Preventing Reclassification of Working Relationships: Employee or Independent Contractor? 



Summer 2006 - (InBrief Summer 2006)

InBrief Summer 2006

Canadian businesses increasingly use a careful mix of independent contractors and employees to satisfy their staffing and operational needs. But, as the dynamics between the business and its workers (in the broad, generic sense) have changed in today's economy, the line between an independent contractor and an employee is often blurred. A significant risk is that a court or government body may find an employment relationship where one of independent contractor was intended, or vice versa. When this happens, it has far-reaching implications to both the business and the worker.

Consider, for example, income tax withholdings, workers' compensation legislation, occupational health and safety, Canada Pension Plan and Employment Insurance deductions, and GST collection. In an independent contractor relationship, the duties and responsibilities of the business and the worker are vastly different than in an employment relationship for all of these important matters. Furthermore, there are risks in common law jurisprudence. For example, a business is more likely to be held liable for the tortious acts of its employees than those of independent contractors

The test in Canada to determine whether a worker is an employee (in law, a "contract of service") or an independent contractor (a "contract for services") is often called the Sagaz test, based on a 2001 Supreme Court of Canada case. Recognizing that any terminology used in the contract is not itself determinative, the Sagaz test searches for the total relationship between the parties and asks the central question, "Is the person engaged to perform the services performing them as a person in business on his own account?" Courts have used many sub-tests and factors to answer that question, but the most common ones come from a 1986 decision of the Federal Court of Appeal, Wiebe Door Services Ltd. v. Canada (M.N.R.). Wiebe Door asks: Who owns the tools? Who has the risk of loss? Who has the chance of profit? and Who has control over the work? While not exhaustive, these Wiebe Door factors are frequently used by courts as a checklist.

A March 2006 decision of the Federal Court of Appeal demonstrates the importance of turning one's mind to the classification of workers while drafting contracts. In The Royal Winnipeg Ballet v. M.N.R ., the Court overturned a decision of the Tax Court of Canada, which had found that dancers were employees and not independent contractors of the Royal Winnipeg Ballet. As the dancers had been working for the Ballet for some years, the Tax Court's decision impacted on the obligations of the Ballet with respect to income tax withholdings and Canada Pension Plan and Employment Insurance deductions. Justice Miller of the Tax Court considered it unnecessary to consider the parties' intention, stating, "Intent only becomes a factor in the event the relevant legal tests yield no definitive result, and where no sham or window dressing is suggested."

The majority of the Federal Court of Appeal disagreed, suggesting a new way to apply the Wiebe Door factors. Justice Sharlow stated that the intention of the parties should only be disregarded if the "terms of the contract, considered in the appropriate factual context, do not reflect the legal relationship that the parties profess to have intended." Justice Desjardins concurred with Justice Sharlow, finding that the important consideration is to "make sure that what the parties say they have agreed upon is in fact what is contained in the contract they have signed."

For example, consider a worker who has complete autonomy over her day-to-day activities in accomplishing company-assigned objectives, who works solely for that one company but uses some of her own tools and only the company's office space. Her contract does not specifically state the nature of the relationship between the parties. While the worker has an assigned task, the company does not exercise any control over her in accomplishing it. She uses her own tools, but she works at the company office. In this case, the traditional factors are inconclusive, and a third party could find the worker to be either an employee or independent contractor depending on the weight assigned to the factors.

What if the contract in our example stated that it was a contract of employment, and used consistent employment language, and the parties agreed that it was an employment contract? The majority of the Federal Court of Appeal in Royal Winnipeg Ballet suggest that the proper question is whether, on balance, the traditional factors are consistent with the stated, evidenced intention or are more consistent with some other relationship. By stating the intention, the parties in our example have given themselves an extra measure of protection: while the Wiebe Door factors are inconclusive, they are not "more consistent" with an independent contractor relationship.

There are important lessons to be learned from the Canadian jurisprudence, and a business can diminish the potential for judicial or governmental recharacterization of its relationships with its workers by proactively taking steps to shape a favourable interpretation.

First, a business should always consider the legal relationship it intends to establish and ensure that the terms of the contract are consistent with that intention. It should carefully draft the contract based on the tests established in Sagaz and Wiebe Door . For example, a business should not contract to exercise control over the day-to-day details of an independent contractor's work. Furthermore, a business should set out in the contract the Wiebe Door factors, such as which party will supply the tools to be used by the worker and how the worker will be compensated. The contract's drafters should always consider how a third party, looking at the situation, would interpret it.

Second, a business and its workers should act consistently with the relationship they have negotiated and described in the contract, as obligations cannot be avoided by simply calling a relationship something different from what it is. A contract that says "independent contractor" while the actual relationship screams "employment" will not be helpful.

Last, and highlighted by the majority decision in Royal Winnipeg Ballet , the contract should explicitly state the relationship that the parties intend to achieve. The evidence of both parties' intentions in the contract itself can serve as an important starting-point in any judicial or governmental analysis of the relationship. While the words themselves will not determine the nature of the relationship, they may play a vital role in protecting both the business and its workers from unforeseen risks and consequences.

This article was reprinted with permission on the website of the Human Resources Professionals Association of Ontario  and also in the newsletter of the Canadian German Lawyers Association German Chapter.

This article appeared in InBrief Summer 2006