Dependent or independent? Status of contractors grows in importance

With the rise of “gig” workers and remote work since the pandemic, determining whether an employee is an independent contractor, dependent contractor or de facto employee at the outset of employment has become increasingly important.

Not only that, the classification of employees can change during the course of employment or after a contract is signed, so keeping track of the employment relationship is also essential to avoiding potential litigation.

Irv Kleiner, partner at Torkin Manes in Toronto, told HRD that the issue of classification has gotten increased attention in courts since the pandemic, especially in cases where a gray area has resulted in potential underpayment of termination compensation.

Increase in independent contractors

“When people started losing their jobs, and they weren't able to secure alternative employment, what a lot of people ended up doing was going into business for themselves, and providing their services even, in many cases, to their former employer,” Kleiner said.

“We were seeing more and more of these kinds of relationships emerge during a period of high unemployment … for many of these contractors, it actually turned into a pretty good gig, and they were making pretty good money.”

However, a gray area has emerged, he explained, which has seen courts making decisions around when an independent contractor should have been treated as a dependent contractor, or an employee, especially in cases of termination.

“It became apparent that many of these relationships weren't true independent contractual relationships. There were high levels of dependency by the service provider on the client.”

In several leading court decisions, judges have determined a framework that employers can look to when assessing how to classify an employee or contractor.

Financial dependence a main decider of employee status

Canadian courts have recognized a third category of contractor, the “dependent contractor”, which acknowledged that many workers in Canada do not entirely fall under independent contractor or employee classifications, but somewhere in between.

These workers, while still contractors, fall under the same common law considerations and rights of employees, meaning they can be entitled to the same amount of notice and compensation when having contracts terminated.

The main determinant of this employment status is financial dependence; if a contractor works exclusively or near exclusively for a single client, that could deem them a dependent contractor in the eyes of a court. In a 2022 Ontario Superior Court decision, it was ruled that billing percentages of more than 80% of a contractor’s income amounts to near exclusivity.

Additionally, that decision found that “self-induced” exclusivity can negate a contractor’s claim of dependency.

In addition to financial dependence, courts – and HR professionals – can use a “control test” to determine if a worker is a dependent contractor, Kleiner explained.

“[It’s about] to what extent does the client exert influence over the contractor in terms of satisfying hours of work, performing the work according to specifications that have been established by the client, control over other parties to whom the contractor may provide services,” Kleiner said.

“A court or an adjudicator could potentially find that you're an employee and not a contractor – neither a dependent contractor nor an independent contractor. So it really depends on the control.”

Best practices for HR with employment relationships

There is no “one-size-fits-all” contract or template for assessing whether an individual is an independent or dependent contractor or an employee, Kleiner said. Courts have repeatedly determined that such decisions depend on the entire employment relationship of each instance, rather than a “snapshot” of what the relationship was at the time of termination.

Kleiner advises seeking legal advice prior to the drafting of each contract, not after.

“At that point, there's still a great deal of uncertainty, especially if the relationship is one that is going to evolve over time,” he said. “Before entering into these agreements, I think you have to assume that whatever you put on paper has the value of the piece of paper that it's written on.”

As part of the Working for Workers Act, 2022, the Digital Platform Workers’ Rights Act has been adopted in Ontario, which would give extra rights to digital platform workers such as rights to information, minimum wage and notice of removal from the platform. The Act has not yet come into force.