A question that is frequently asked is:

"What is the difference between an 'employee' and an 'independent contractor"? The answer can have significant financial and legal implications to individuals and businesses.

The Employment Standards Act (the "Act") has a broad definition of employee as being someone who works for another, for wages, doing work normally done by an employee. An employee includes a person on leave from an employer and a person who has a right of recall (i.e. the right to be called back within a specified time following layoff).

"Work" is defined in the Act as "labour or services an employee performs for an employer whether in the employee's residence or elsewhere". People working at home that characterize themselves as independent contractors should make careful note of this definition of "work".

If a person is an employee the provisions of the Act apply with respect to the agreement between that employee and his or her employer. The Act imposes minimum standards regarding hours of work, wages, breaks, overtime, holidays, work schedules, layoffs and termination. Statutory deductions from pay for income tax, employment insurance and CPP must be deducted from the employees wages, by the employer, and remitted to the appropriate authority together with the employer's portion of the contribution, if applicable. Failure to do this can make the employer liable for those deductions.

Independent contractors work on a fee for service basis, they present their bill for the task completed and are paid. The independent contractor is responsible for his or her own statutory remittances for income tax, CPP and the like. When the task is done, the relationship between the parties is at an end. The minimum standards and benefits under the Act do not apply to an independent contractor.

There is no set formula for deciding if a person is an employee or an independent contractor. However, there are some factors that are repeatedly considered by the courts and other tribunals and agencies in making that determination:

1. Control - What degree of control does one party have over the other re deciding the task to be done, the way the task shall be done, the time frame to complete the task and the scheduling of duties. Where one party has significant control over the other, an employer employee relationship may be inferred.

2. Integration - Is the task being performed an integral part of the business or is it accessory to it (i.e. an infrequent or one-time requirement)?

3. Specific Result - An independent contractor is generally retained to achieve a specific result rather than provide an ongoing service.

4. Statutory Definitions - The definitions of "employee" and "work" will be considered in making the determination. If the particular circumstance falls within the definitions, a finding may be made that the individual is an employee, regardless of the presence of the other factors.

Businesses and other organizations should be aware of the pitfalls of using "independent contractors" in situations where the law may subsequently determine that those independent contractors are in fact "employees".

Both Revenue Canada and the Employment Standards Branch can make determinations that have a significant financial and legal impact on organizations that have used independent contractors who were in fact employees. Retroactive liability for the employer's share of statutory deductions and liability for employment benefits under the Employment Standards Act can result in significant and unexpected costs and penalties under the applicable statute.

This general interest article is not meant to provide specific advice to any particular situation. If you have a question about employment law or the "employee" versus "independent contractor" issue specifically, we encourage you to contact McConnan Bion O'Connor & Peterson for advice specific to your circumstances.