Differences between Employees and Contractors

Theoretically speaking, there's a world of difference between an employee and a contractor.

Why Does It Matter?

Let's start by looking at the legal consequences of the distinction, before we start looking at the legal differences between them.

An employee, unlike an independent contractor, gets protection of various statutes like the Employment Standards Act.  Minimum vacation entitlements, minimum wage, limitations on hours of work, mandatory breaks, etc.

An employment relationship also requires the employer to withhold and remit income taxes to the CRA on the employee's behalf, as well as EI and CPP contributions.  (Employers are also required to make EI and CPP contributions of their own in respect of employees.)  By contrast, an independent contractor has to make his own CPP contributions (in the full amount, including what would otherwise be the employer portion), doesn't get EI, and collects the full amount of his bill plus HST, with no obligation on the payor to withhold and/or remit taxes to the CRA.

The independent contractor, unlike the employee, is seen as a business owner, and is therefore able to write off  business expenses for tax purposes.  

Thus, all other things being equal, there are advantages and disadvantages to workers of being employees versus independent contractors.  (Contractors don't get protection of employment standards nor EI, and the framework on termination is often less favourable, and there's also more personal administrative responsibility for accounting and payment of taxes, etc.; on the other hand, there are often tax savings to being an independent contractor.)

For businesses, it's generally better to have contractors than employees.  Yes, I may pay 13% HST for the services I'm buying, but I get that back through credits based on the HST I'm collecting from my own customers.  In the mean time, I'm saving on EI, CPP, and potentially on other things like overtime costs, public holiday pay, vacation pay, etc.

So many payors want to structure their contracts as contracts for service (i.e. independent contractors) as opposed to contracts of service (i.e. employment contracts).  To do so, they put terms expressly saying that the worker is an independent contractor, not an employee, and will be responsible for their own CRA remittances, and will provide accounts to the payor for services rendered, with HST, etc.  (At least, the more elaborate ones go down that road.)

And workers will agree to this, partly because of an imbalance in bargaining power, but also partly because there's something attractive about being able to write off expenses as business expenses like a wealthy business-owner does.  Particularly on the termination of the relationship, though, a contractor may be in a much worse position than an employee.

The Legal Test

I know many experienced and sophisticated businesspeople, some of whom are extremely successful, and among them there seems to be a belief to the effect that the contract is God.  They are often quite surprised when I tell them otherwise.  (I recently had a dinner conversation with such an individual where he was quite surprised to learn that the minimum statutory notice cannot be contracted out of.  He doesn't like this reality, because of the prospect that a sophisticated employee could take advantage of an employer by negotiating terms he knows are unenforceable.  This is possible, but I would never recommend an employee do that for reasons of poor predictability, and it's certainly the minority case for employment contracts that a sophisticated employee is able to pull the wool over the eyes of a less sophisticated employer.)

The contractual terms aren't irrelevant.  How the parties have chosen to characterize the relationship is not completely devoid of legal meaning, but nor is it determinative - it is one among several factors that Courts will look at to determine whether an arrangement is a contract of service or a contract for service.

There are other factors, too:

(1)  Control:  To what extent is the worker directed by the payor?  Does the payor control the hours of work?  How and when the work will be performed?  Is the payor able to discipline the worker?

(2)  Ownership of tools:  Who actually owns the tools and other devices necessary for the work to be completed?  If I actually had to invest in my own business by purchasing the tools of my trade, then it's much more likely that I'm a bona fide business owner.  If I rely on my client to have the tools of my own trade for me to use, then...less so.

(3)  Chance of profit:  In general, most employees will have the bulk of their remuneration calculated by a pre-established formula based on a salary or hourly wage.  Contractors, on the other hand, tend to get paid by the job, and while hourly billing isn't unheard of, especially in certain industries, there's certainly a per value element to the calculation.

(4)  Risk of loss:  Most employees pay virtually nothing out of their own pockets.  If a job goes south, an employee loses income, but hasn't usually invested much more than time into it.  On the other hand, a contractor may have incurred out-of-pocket expenses, wages for other employees, and other overhead costs, meaning that if the job ends up taking longer or more resources to complete than anticipated, or the payor doesn't end up paying, the contractor has potentially suffered a loss of more than just time.

At its core, factors such as these are designed to flesh out the essential question, posed by Lord Wright in 1947:  Whose business is it?

Then What Happens?

There are a few contexts in which these disputes get fleshed out.  Sometimes, the CRA lifts up the rug on a 'contractor' relationship and reassesses the parties on that basis.

More often, the worker comes back at the payor after the end of the relationship wanting entitlements based on an employment relationship - EI remittances, pay in lieu of reasonable notice, unpaid overtime or holiday pay.

Even though the parties may have governed their relationship as a contract for service for an indefinite period of time, it remains open to the Courts - at the instance of the CRA or either party - to re-evaluate it.

One should note that, where termination of the relationship is involved, there's also what sometimes gets referred to as the intermediate category, or "dependent contractors", who are not employees yet still get employee-style rights such as reasonable notice of termination.

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This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

Employment Disputes of Lawyers

I came across an interesting case some time ago involving two lawyers in a small firm, Dawn Bennett and Karen Cunningham.

Cunningham was called to the bar in 1996, and opened up her own practice in 1997 in several areas of law.  Bennett was called to the bar in 2001, and accepted a position as a junior litigation lawyer with Cunningham in July 2002.

The relationship broke down quickly, with Cunningham terminating it on January 10, 2003.  Despite the brief relationship, there are a number of interesting employment issues in it, including the distinction between employees and independent contractors and just cause.

Bennett's compensation was not salaried.  Rather, Bennett was to be paid a commission of 50% of all fees billed and collected.  She received advances on commission at a rate of $38,000 per year.  All office equipment and infrastructure was provided, and all files ultimately belonged to Cunningham, but Bennett was responsible for the payment of her own Law Society dues and professional insurance premiums, as well as employee deductions.

Bennett developed some concerns with the relationship fairly quickly.  In particular, though she was busy and working long hours, she was concerned that the office lacked the tools (technological in particular) for her to do her job.  She proposed a business plan to Cunningham to correct this, about a month in.  At the same time, she expressed concern about the fact that she had been required to sign a written employment agreement on the first day of work, though no written employment agreement had been discussed before then.  In response to these concerns, Cunningham invested in voicemail and a well-known piece of practice management software called Amicus Attorney, and also implemented some of Bennett's other file management suggestions.

A common practice among older lawyers (though growing less so with younger lawyers, including Bennett and Cunningham's generation) is to handwrite all time dockets for data entry by the receptionist.  This was the practice in Cunningham's office, at least until the introduction of the Amicus Attorney software.  The process was interrupted somewhat by the sudden departure of the receptionist in August 2002.

By November, Bennett was becoming concerned about the entry of her time dockets and collection of her accounts.  A subsequent comparison between her handwritten notes and computer records indicated that 42.8 hours of time had not been entered.  In addition, though her share of fees billed at that time was approximately $26,500, only 10% of that had been collected.  As December rolled along, Bennett became increasingly concerned; the gap between fees billed and collected was increasing, to the point that her advances exceeded her actual commission after only five months by about ten thousand dollars.

In December, Bennett reviewed some of the accounts rendered, and discovered something quite alarming:  There were a number of instances in which time she had docketed had been credited to Cunningham.  She met with Cunningham about it, and was advised that the errors would be corrected upon receipt of copies of accounts where such errors had occurred.

Just before Christmas, 2002, Bennett gave Cunningham a letter documenting 9 areas of concern.  In it, she was highly critical of Cunningham's systems for, among other things, file management and docketing.  On docketing, especially, she said the following:

Many of the dockets that were entered by hand were credited to your dockets instead of my dockets.  There has been no attempt on your part to reconcile these problems despite my repeated and numerous requests.  As my income depends solely on my billable hours docketed and collected, the monetary gain to you is both dishonest and negligent.  I have no control over the docketing system.  It is your system.  As a result of your flawed docketing system you have gained income that should be attributed to me.  I need an accurate reconciliation of the docketing system to reflect my dockets.

This letter became a major factor in the litigation, when Bennett sued for unpaid commissions and wrongful dismissal, because Cunningham took the position that it created just cause for termination.  Bennett's defence to that hinged on the closing language of the letter:  "I would like to work together to resolve these issues.  Kindly contact me so that we may work together to make this arrangement a successful one for both of us."  When the case went to trial in 2006 (decision found here), the trial judge described it thusly:

The overall tone of the letter was anything but courteous.  It was critical. It was accusatory. It was disrespectful. The letter suggested that Ms. Cunningham was disorganized, incompetent, dishonest and negligent.

The Issues


(1)  Contractor versus Employee


Cunningham took the position that Bennett was an independent contractor, and therefore not entitled to reasonable notice of termination.

Cunningham noted, in support of this argument, that Bennett was paid on a commission basis; that she submitted periodic invoices for professional services rendered; that Bennett was responsible for her own income taxes/payroll deductions and professional dues and insurance; and that the intention of the parties was that Bennett would be an independent contractor.

The trial judge, however, noted that it was for the Court, and not the parties, to determine whether or not Bennett was an independent contractor.  The intention of the parties is not determinative.  The trial judge found that she was either an employee or a member of the "intermediary category", which meant that in the absence of just cause she would be entitled to reasonable notice of termination.

The factors reviewed in the trial judge's reasons included that Bennett was expected to be in Cunningham's office 9-6 Monday to Friday; that the clients and their files belonged to Cunningham; that Bennett did not provide any of her own office equipment; that Bennett did not hire any employees at her expense nor did she pay rent for her office; that Bennett took some financial risk in the commission structure (this was the sole factor leaning towards a finding that she was not an employee); but Bennett did not have any opportunity for profit beyond the 50% commission structure.

(2)  Just Cause

The letter was the crux of the "just cause" argument.  The trial judge notes that a single incident of insolence (defined as "derisive, contemptuous or abusive language or conduct directed by an employee at his/her employer") can be sufficient to justify summary dismissal if the employee and employer are no longer capable of maintaining a working relationship.

Finding that "[t]he relationship between lawyers practising in the same law office is fundamentally based on confidence, respect and trust", the trial judge concluded that the insolence undermined the relationship and that Cunningham's conclusion that the relationship could no longer be sustained was reasonable.  Therefore, there was just cause for termination, and no pay in lieu of notice was required.

The Divisional Court, however, reversed the finding of just cause on appeal in 2011.  (Decision found here.)  The Divisional Court concluded that the only passage which could reasonably be seen as insolent was the phrase "dishonest and negligent", and that all of this should have been read in light of the invitation at the end of the letter to resolve the existing issues; thus, the letter could not be seen as making the continuation of the employment relationship impossible.  (Further, Bennett's employment was not immediately terminated, which did not amount to condonation but did provide a contextual factor supporting the conclusion that the employment relationship was possible to continue despite the letter.)

Lessons to Learn


Firstly, just because you have a contract saying that somebody is an independent contractor does not prevent a Court from going underneath that characterization and finding otherwise, depending on the actual circumstances of the relationship.

Secondly, this case gives some guidance to employees who find themselves having increasing issues with their employer.  There's a lot of wisdom in the "If you can't say anything nice..." saying.  While I'm a big advocate of 'setting the record straight', Courts do tend to understand that employees don't necessarily feel empowered to contradict the employer or seek to change conditions which are intolerable.

However, the Divisional Court's decision in this case sends a clear message to employees that they are allowed to object to employer actions that they find intolerable, and do not have to do so in a manner which is overly cowed or deferential.  Provided that the overall message of the objection is "These are the issues; let's work on fixing them", and there is nothing that clearly crosses the line into the inappropriate in the letter, it will not be regarded as just cause for dismissal.  (However, when one starts getting into swearing, name-calling, gratuitous strong language, sarcasm, etc., it gets more risky.)

Likewise, this case is a caution to employers not to overreact to such letters from employees.  When an employee is expressing concerns, an employer should consider the employee's concerns.  Ideally, if a concern has merit, an employer ought to address that concern with the employee, and seek a solution.  On the other hand, employees often over-estimate their own power in the employment relationship, and so will sometimes make demands that are unreasonable, in which case an employer can go to varying levels of effort to explain to the employee why his demands are unreasonable.  Ignoring a critical letter from an employee is never a good idea.

Where the line is crossed into insolence, however, appropriate discipline should be imposed, regardless of whether or not the employee's concerns in the letter are justified.  So one can imagine a circumstance in which an employee writes a letter which has insolent tones and contents, but which seeks, for example reasonable accommodation of a medical condition.  The employer then needs to address the request for accommodation through its ordinary accommodation policies, but should *also* consider disciplinary action for the impropriety in the letter itself, making it clear that the substance of the request for accommodation has absolutely nothing to do with the imposition of discipline.

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This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

Wrongful Dismissal Damages for Contractors

Usually, when we think about wrongful dismissal, we're talking about employees. You can't fire someone not in your employ, after all.

Independent contractors are usually retained for particular tasks, then their engagement ends on completion of the task, so there's really no such thing as wrongful dismissal in that context, right?

But, as is common in law, there are grey areas.

The employee/independent contractor distinction is the subject of a lot of jurisprudence, and there are fairly well-established tests for the distinction. Putting in the contract that the worker is an independent contractor is only one factor. When the worker doesn't control his or her hours of work, doesn't own his or her tools, doesn't control the timing and manner of completion of the task, and/or doesn't bear a risk of loss or chance of profit in the arrangement, it is more likely that the worker will be found to be an employee.

There is also an intermediary category, however, often referred to as a "dependent contractor". This is a contractor who doesn't meet the definition of an employee, but who relies so heavily upon one client that the relationship is akin to an employment relationship. Recently, in the Sarnelli v. Effort Trust Company case, a locksmith contractor was blacklisted for no apparent reason by a mortgage company. Effort Trust had made up 2/3 of the locksmith's total billings. (You might ask why a mortgage company would so extensively need a locksmith: Unfortunately, mortgagees occasionally have to take possession of the mortgaged property.)

The Court found that the contractor was a dependent contractor, and awarded an estimate of what profits he might have made through a six month notice period, being $18,900.

It is, however, a small victory for the plaintiff. The relationship was terminated was in August 2005; the judgment was in April 2011. Devastated by the loss of his major client, he basically gave up on the business and closed it down in 2006.

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This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.