HIRING INDEPENDENT CONTRACTORS? WHAT TYPE OF CONTRACT IS NEEDED?

For businesses, startups, and entrepreneurs in Ontario, properly distinguishing between an independent contractor and an employee is essential to minimizing legal and financial risks. Misclassifying an employee as an independent contractor can result in significant consequences, including retroactive payments for vacation pay, overtime, and other statutory entitlements. The Canada Revenue Agency (CRA) may also impose penalties for unpaid CPP and EI contributions, along with interest and fines. Misclassified workers may pursue wrongful dismissal claims, seeking notice or severance pay under Ontario’s Employment Standards Act, 2000 (“ESA”).

While a well-drafted contract is key to establishing and maintaining an independent contractor relationship, the behavior of the parties and how the relationship operates in reality will ultimately determine whether someone is an employee or an independent contractor. Courts and regulatory bodies in Ontario examine the actual nature of the working relationship, looking beyond the language of the agreement. If a worker is labeled as an independent contractor but treated as an employee, the contract’s terms may be rendered unenforceable. To mitigate these risks, businesses must ensure their contracts accurately reflect the intended relationship and that the worker’s treatment aligns with those terms.

Understanding the Key Differences

Ontario courts and regulatory bodies use various tests, such as the Control Test[1], the Integration Test[2], and the Entrepreneurship Test[3], to assess whether a worker is an independent contractor or an employee. These assessments focus on the substance of the working relationship rather than the labels used in contracts. The following non-exhaustive factors are among the most significant in determining the nature of the relationship:

1. Control

The level of control a business exercises over how, when, and where a worker performs their tasks is the most important indicator of the nature of the relationship.

Employees are typically subject to significant oversight. The employer dictates their work schedule, tasks, and methods, often requiring adherence to company policies and procedures. This degree of control over day-to-day activities is a strong indicator of an employment relationship.

Independent contractors maintain autonomy over their work. They decide how tasks are completed, set their own schedules, and often use their own tools and methods. Contractors are responsible for delivering outcomes rather than following specific processes dictated by the hiring business.

2. Integration into the Business

This factor examines whether the worker’s contributions are central to the business’s core activities or if they operate independently.

Employees typically hold roles that are integral to the company’s day-to-day operations and overall objectives. Their work is central to the business’s core activities and contributes directly to its primary purpose.

Independent contractors usually work on a project-by-project basis and are not central to the hiring business’s primary activities. They operate as separate entities, often providing specialized services that supplement the business rather than driving its core functions.

3. Financial Risk and Opportunity for Profit

This factor examines the level of financial risk the worker assumes and their ability to earn profits beyond a set payment.

Employees typically face minimal financial risk. They receive a consistent salary or hourly wages, regardless of the business’s performance. Employers provide the tools, equipment, and resources necessary for their role and also handle statutory deductions such as income tax, CPP, and EI. Employees do not bear operational expenses or financial liabilities associated with their work.

Independent contractors operate as separate business entities and bear financial risks associated with their work. They manage their own expenses, such as purchasing tools or software, and are responsible for remitting their taxes, CPP contributions, and other statutory obligations. Contractors also have the potential to earn higher profits by managing multiple clients or completing projects efficiently, but they may also experience income fluctuations depending on the demand for their services.

4. Provision of Tools and Resources

This consideration reflects the level of independence and investment in the working relationship.

Employees typically rely on the employer to provide all the tools, materials, and workspace required to perform their duties. This includes equipment such as computers, office supplies, and any specialized tools necessary for their role. The employer also covers the costs of maintaining and replacing these resources.

Independent contractors are expected to supply their own tools, technology, and materials. They assume the costs associated with purchasing, maintaining, and upgrading these resources. This investment reinforces their independence, as it demonstrates their operation as a separate business entity.

5. Exclusivity and Dependency

This factor examines whether the worker relies solely on one client for their income or has the flexibility to work with multiple clients.

Employees generally work exclusively for one employer, making them financially dependent on that single source of income. This exclusivity often includes restrictions on taking additional employment or providing services to other businesses.

Independent contractors typically have the freedom to work with multiple clients simultaneously, reflecting their financial independence. They operate as separate entities and are not dependent on any single client for their livelihood.

6. Delegation of Work and Use of Helpers

The ability to delegate tasks or hire helpers is another important factor that differentiates independent contractors from employees.

Employees are usually required to perform their work personally and cannot delegate tasks or hire helpers without the employer’s consent. The employer expects the individual to carry out their assigned duties directly.

Independent contractors have the autonomy to delegate work or engage assistants or subcontractors at their own discretion and expense. This flexibility is a hallmark of an independent business operation and reinforces their independent status.

Drafting Contracts for Independent Contractors

An independent contractor agreement must clearly emphasize the contractor’s autonomy and establish their status as a separate business entity. It is crucial that the agreement reflects the intended relationship and aligns with how the contractor will be treated in practice. To achieve this, the following key terms should be included:

1.Scope of Work

2.Independence Clause

3.Payment Terms

4.No Benefits or Deductions

5.Non-Exclusivity

6.Risk and Liability

7.Confidentiality and Intellectual Property

8.Term and Termination

 

Each of these clauses plays a critical role in protecting the hiring business and defining the relationship in compliance with Ontario law. Regularly reviewing both contractor and employee agreements ensures they remain legally sound and accurately reflect the nature of the working relationship.

For assistance in drafting or reviewing contracts to ensure compliance and clarity in your working relationships, contact Shokouh Abadi at info@kimeglaw.ca.

 

THE CONTENTS OF THIS ARTICLE ARE PROVIDED FOR GENERAL INFORMATION PURPOSES ONLY AND DO NOT CONSTITUTE LEGAL OR OTHER PROFESSIONAL ADVICE OF ANY KIND. YOU SHOULD NOT ACT OR RELY ON ANY INFORMATION IN THIS ARTICLE WITHOUT FIRST SEEKING LEGAL ADVICE SPECIFIC TO YOUR SITUATION.

 

[1] Belton v. Liberty Insurance Company of Canada, 2004 CanLII 16247 (ON CA)

[2] Weibe Door Services Ltd. v. M.N.R., [1986] 3 SCR 461

[3] 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59