How Does the Law Determine Whether a Person Is an Employee or Contractor?

The Law Considers Much More Than Just the Use of the Words Employee or Contractor Within a Document and Involves Various Factors Such As Genuine Independence In Performing Hired Tasks When Reviewing Whether a Person Was Legally An Employee or Contractor.

A Helpful Introductory Guide For How to Determine What Legally Differentiates An Employee From An Independent Contractor

Contract Document When a person is being hired to perform some sort of working role for a business, the ultimate nature of the servant relationship, as to whether the person will be deemed by law as an employee or as a contractor, may result in the swing of a future legal dispute.

The Law

Whether a person is entitled to various rights prescribed by the Employment Standards Act, 2000, S.O. 2000, Chapter 41, such as termination pay, vacation pay, parental leave, among many other things, depends on whether the person is ultimately deemed an employee or contractor.  Additionally, whether an employer is required to remit taxes and other payroll deductions, is exposed to vicarious liability concerns, among other issues is also affected by the ultimately determined status of a servant as either an employee or as a contractor.

Both sides to a master-servant relationship should understand that it takes much more than simply labeling the relationship as an independent contractor relationship rather than employment relationship to legally establish the difference.  Indeed, in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R. 983 the Supreme Court has said that:

The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account.  In making this determination, the level of control the employer has over the worker's activities will always be a factor.  However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker's opportunity for profit in the performance of his or her tasks.

It bears repeating that the above factors constitute a non-exhaustive list, and there is no set formula as to their application.  The relative weight of each will depend on the particular facts and circumstances of the case.

In the last few decades, the trend of hiring contractors as opposed to employees is much on the rise.  It is common that businesses prefer the independent contractor relationship as this type of an arrangement often has significant benefits such as reduced legal obligations and reduced paperwork; however, it is also necessary to carefully review the true nature of the relationship when disputes arise whereas what was labelled as an independent contractor relationship may be determined by a court as legally being something else.

Summary Comment

The applicable rights, duties, and legal affect, that often results from a determination of whether a person is, or was, an employee versus a contractor can be very significant.  If a person is deemed an employee, the person may be entitled to the full rights and benefits as prescribed within the Employment Standards Act, 2000 as would otherwise be unavailable.  If a person is deemed a contractor, the person may be liable to the government for the remittance of various taxes and deductions, among other things.


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