Sam Zargami | Queen’s Venture Law Society | October 2021
Editors: Jakob Wildman-Sisk | Queen’s Venture Law Society, Nicolas Guevara-Mann & Mikela Page | Queen’s Business Law Clinic
A common dilemma for employers is deciding whether to hire workers as employees or independent contractors. These two classifications for workers are similar. They both require the completion of a job in exchange for compensation. In practice, however, the two designations are starkly different with regard to independence, responsibilities, and legal consequences. We will be looking at some of the differences between employees and independent contractors and outlining the implications that these distinctions can have on small businesses.
Employee
An employee operates as part of the employer’s business, providing a contract of service. In an employee/employer scenario, the employer is the “boss” who maintains primary control over the employee’s duties and responsibilities.
During the day-to-day life of an employee, it is expected that they will be supervised while conducting work tasks, and uniforms may be required. Additionally, an employee’s hours and place of work will be determined by the employer. An employee’s financial compensation is paid based on a salary or a fixed wage and any overhead expense will be covered by the employer. Thus, there is no risk to the employee of generating little or no income. Further, employees are often restricted from working for other employers. Employees have minimal bargaining power but are protected by various employment laws, such as minimum wage laws, workers’ compensation, reasonable notice, and various tax laws.
Independent Contractor
Independent Contractors are considered to be operators of their own business, providing a contract for service to an employer. In an independent contractor/employer relationship, independent contractors are self-employed and act as their own “boss”. This provides the independent contractors with significant control over their schedule and duties.
Independent contractors can work free of supervision, are free to schedule their own hours and decide their work location, and uniforms are optional. Independent contractors are usually compensated by commission after the completion of a project, and they are free to work with, and be compensated by, several clients. Independent contractors often have significant bargaining power but, unlike employees, they are not protected by most employment laws. This means that there is no obligation for employers to provide them with minimum wage, overtime pay, vacation pay, or workers’ compensation contributions. Employers can also terminate independent contractors much easier than they could employees. Finally, independent contractors are responsible for their own overhead expenses. Practically, this means that they must absorb costs and are responsible for expenses that employers would typically cover for employees.
How to Tell if a Worker is an Employee or an Independent Contractor: the Workers Classification Test
In theory, the difference between an independent contractor and an employee is deceptively simple. In practice, this distinction can be difficult to identify because some workers do not fit neatly into one category or the other. To classify workers, courts and administrative tribunals will examine the “total relationship of the parties” to determine the true status of a worker. Courts have stated that how a contract describes a worker, while relevant, is not determinative of the worker’s status. If it was, employers could easily abuse their responsibilities to workers by simply including a term in every employment contract stating the worker is certain classification. As stated, to determine a worker’s classification, a court will consider the relationship between employer and worker, in totality. The considerations below can guide this classification analysis:
|
Question |
Independent Contractor |
Employee
|
|
|
Minimal Control |
High Control |
|
The worker’s ability to be hired by other employers
|
Working for other clients is allowed |
Working for other employers is not allowed/not possible
|
|
The worker’s ability to hire other helpers
|
Worker can hire other helpers |
Worker cannot hire other helpers |
|
Whether the employer sets the hours of work, location, and the amount of work to be completed
|
Independent contractor has more freedom with hours, location, and work completion |
Employee has minimal freedom with hours, location, and work completion
|
|
Whether uniforms, mandatory attendance, and adherence to workplace procedures are required
|
Independent contractor can follow their own rules and procedures |
Employee must follow company rules and procedures or expectations of the employer
|
|
Whether the worker is reimbursed for their operating expenses |
Independent contractors are responsible for their own operating expenses |
Employer covers most operating costs |
|
Whether compensation is received through invoice or payroll
|
Compensation received by invoice based on project |
Compensation received by payroll, usually on an hourly basis or a fixed salary |
The Importance and Consequences of Misclassification
Understanding the type of each worker can be important to employers for several reasons, namely because improper classification can lead to employer liability. Typically, misclassification of workers happens when the wrong set of employment laws are applied to a worker. For example, a worker could carry all the attributes of an employee but be treated as an independent contractor by an employer. In these cases, an employer can be liable for the following:
- Unpaid wages;
- Unpaid income taxes;
- Claims for wrongful dismissal;
- Unionization campaigns, and more.
In summary, misclassification can lead to financial liability. An employer that misclassifies a worker may receive a fine of up to $500,000 on top of wages and other liabilities owed to the workers.[1] Misclassification can also result in class action lawsuits against employers. This is what is currently happening in the case of Uber Technologies Inc. v Heller, where the plaintiff workers are seeking $400 million in damages.[2]
Evidently, it is important that both employers and workers are well-informed about whether they want to hire (or work as) an employee or independent contractor, or they may face significant financial consequences.
Photo by Los Muertos Crew from Pexels
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