Employees, dependent contractors and independent contractors: A tale of three classifications of workers

Not every worker is considered an “employee” of the person or entity that pays them for their work. Similarly, even if a contract describes a worker as an “employee,” that classification may be contrary to the law.

The technical classification of a worker might seem like mere semantics, but it can have serious implications for the rights and liabilities of both the worker and the payor. This article will explore the three main types of worker classifications and what they mean.

What class of worker?

There are generally three classes of workers: the employee, the dependent contractor and the independent contractor. In a broad sense, the difference between these classes is based on the strength of the connection between the worker and payor, with employees having the strongest and most direct connection, and independent contractors having the weakest and most indirect connection. Dependent contractors fall somewhere in the middle.

Canadian courts and administrative tribunals are frequently tasked with classifying workers. In doing so, they do not simply look at the terms of the contract between the worker and payor for the answer. Instead, courts will look critically at the actual relationship between the two parties and ask some or all of the following questions:

• Which party has the control in the relationship? Courts will consider which party controls:
  • Where the worker works
  • When the worker works
  • For whom the worker works, in terms of both:
    • the worker’s clients/customers
    • whether the worker must work exclusively for the payor or can also work for others at the same time
  • How the worker works, in terms of:
    • the methods used
    • whether the worker personally does the work or can hire others to do the work
    • whether the worker must comply with the policies of the payor
  • Whether the worker works, in the sense that the worker can accept or refuse to do so
• Which party owns the tools/supplies/equipment needed to perform the work?

• If things go wrong or right, which party bears the risk of loss or the chance of profit? Here, courts will consider which party:
  • is financially responsible for the failure to complete any work or for any deficient work
  • bears operating costs (e.g. for office space, staff, vehicle leasing, etc.)
  • sets the prices for the work performed by the worker

In simple terms, courts ask: Whose business is it? Who has the control in the relationship? The greater the control and independence of a worker, the more likely they are to be classified as an independent contractor. A worker who has less control over their work and who has greater dependency on the payor is more likely to be an employee. As noted above, there are also workers who fall somewhere in the middle, who are called dependent contractors.

So what is a dependent contractor? A dependent contractor is a type of non-employee contractor that, despite having enough control and independence to be ousted from the employee class, is still economically dependent on the payor to a significant degree. This situation often arises where the worker provides their services exclusively (or nearly exclusively) to a particular payor. The degree of dependency between a contractor and payor is determined by relationship factors such as:

• Duration/permanency
• Degree of closeness/reliance
• Degree of exclusivity

The more dependent the relationship, the more likely a contractor will be a dependent contractor and not an independent contractor.

What are the implications of each class of worker?

What does it practically mean to be a employee versus a dependent contractor versus an independent contractor? One of the most significant implications of a worker’s classification is obligations owed to them by the payor. In short, a payor is obligated to provide an employee with various entitlements and benefits, which it does not owe to an independent contractor. A general, non-exhaustive summary of entitlements is set out below:

• A payor owes an employee:
  • Legally compliant notice upon termination of the employment relationship
  • Deduction of contributions to the Canada Pension Plan
  • Deduction of Employment Insurance premiums
  • Deduction of applicable federal and provincial income taxes
• A payor owes a dependent contractor:
  • Possibly reasonable notice upon termination of the contractual relationship
• A payor owes an independent contractor:
  • None of the above

Important qualifiers

This article has discussed factors that are commonly used by courts to determine the class of worker, including for the purpose of determining whether notice is owed upon termination. It is important to note that sometimes the answer to the question, “What class of worker is this individual?”, depends on the context in which the question is being asked. Some legislation includes its own statutory definitions of terms like “employee,” ”dependent contractor” and “independent contractor” which may vary from the tests described in this article.

Finally, where the question is asked for the purpose of enforcing an individual’s rights, a more liberal approach may be taken. For example, if a worker is accused of discriminating against a customer of the payor, a court may find that a worker is an employee for the purposes of human rights legislation, even if not for other purposes.

If you are a worker or payor with questions about worker classifications and what rights and obligations may follow, the lawyers in our Employment & Labour practice would be pleased to assist you.