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Individuals and organizations often structure their working relationship so the individual provides services as an independent contractor, rather than as an employee. There can be advantages for both parties in this sort of arrangement.

Organizations enjoy the flexibility of engaging individuals with specialized skills on an as-needed basis, without the expense of group benefits, overhead and compliance with statutory requirements, such as paid vacations and public holidays. The independent contractor enjoys the ability to claim tax deductions for business expenses that are generally not available to employees. For both parties, however, there are risks in mischaracterizing a worker as an independent contractor when the work relationship is actually one of employer and employee.

The question is how can parties know what sort of relationship they have created?

With many employees now working from home and independent contractors often doing the same work as employees, the true nature of the relationship between an individual and an organization is not always obvious. In every case, courts, tribunals and tax authorities have focused on the substance of the relationship, not its form.

To determine if a worker is an independent contractor or an employee, courts and government agencies apply variations of a four-part test confirmed by the Supreme Court of Canada. The test is based on the examination of the following key factors in the relationship: control, ownership of tools, chance of profit/risk of loss, and integration. One factor alone will not be determinative of the issue.

In analyzing the degree of control exercised over an individual’s work, the key consideration is “who directs the work?” In a traditional independent contractor situation, the contractor decides how the work will be performed. In contrast, employers typically direct how, when and where an employee is to perform the work. The more control an organization exerts over the work, the less likely the relationship will be found to be that of an independent contractor.

The ownership-of-tools factor looks at who owns the equipment or resources used to perform the work. However, as noted above, a single factor like ownership of tools will not be determinative. If a worker has a chance of making a profit on the work or runs the risk of loss, the relationship will look more like a business relationship than an employment relationship. Finally, where an individual’s work is integrated into the commercial activities of the employer, it is more likely that an employer-employee relationship exists.

Given the potential financial consequences of getting it wrong, individuals and corporations should seek appropriate legal advice prior to formalizing their working relationship.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2021 Nelligan O’Brien Payne LLP.

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