people sitting in a subway carOne Bill 148 amendment that could hit businesses hard is the tightening of the law around who is an employee. In the event of a misclassification — an independent contractor who should be classified as an employee — the onus is now on the business to prove the individual is NOT an employee.

Why Use Independent Contractors vs. Employees and What’s the Difference?

Often businesses use a blend of workers. Employees can be hired for either fixed or indefinite terms, and independent contractors or consultants can be retained to provide services on a specific project without becoming employees. There are practical differences between these two categories for the worker and the business. The following chart highlights some of them.

Employee Independent Contractor
Employees are entitled to statutory benefits and protections under the Ontario Employment Standards Act like minimum wage, overtime pay, personal emergency leave, parental leaves, notice of termination, severance pay etc. Independent contractors have no entitlement to Employment Standards Act benefits or protections.
Employees are paid wages with payroll deductions such as CPP, IE and Income Tax  taken by the employer. Independent contractors invoice the business for their work and make their own remissions to the government — Income tax, HST etc.

Independent contractors run their own business and can deduct business expenses from their earnings.

Employees are paid a salary or wages, usually in the same amount regardless of the profitability of the business. Because independent contractors run their own businesses, they assume risk for the businesses profitability or losses.
Employees are usually required to devote their full time and attention to their employer and cannot have side businesses or work elsewhere. Independent contractors run their own business and can provide services to multiple clients at one time.
Employees are provided with all tools and equipment required to do their job — uniform, computer, office space, cell phone etc. Independent contractors furnish themselves with the tools and equipment they need to perform services for the business.
Employees must perform their work themselves and cannot hire someone else to do their job. They are constrained in how they carry out their duties by the direction of the employer. Independent contractors design their own working arrangements, can hire their own employees and can control the way in which they provide services.

 

Consequences of Misclassification for Businesses

The current state of the law in Ontario is that if an independent contractor claims to be an employee, the onus will be on the business to prove that the independent contractor is not. This can be difficult for businesses who will not have access to evidence about the inner workings of the independent contractor’s business. For example, it may be difficult for a business to prove that an independent contractor has other clients when they do not have access to their books.

If an employee is found to have been misclassified as an independent contractor this can generate significant financial liability for employers. A freshly classified employee can make a retroactive claim for minimum wage, vacation pay, public holiday pay, overtime pay as well as termination and severance pay. An employer may also be in a position of backpaying unpaid CPP and EI contributions to the government.

What Can Businesses Do?

Businesses should do a proactive review of their workforce and contracts. If there are independent contractors who are effectively being treated like employees, it may be time to bring them on board. When hiring, even if a worker insists that they want to be an independent contractor and not an employee, employers will be wise to take a hard look at the situation and seek legal advice before agreeing. In the event of a later challenge, the practical reality will govern the classification and not what is written in a contract.

If your business is dealing with staffing decisions or is facing a potential misclassification situation contact us. We can provide you with practical advice and help you sort through the complexities. For more on Bill 148 check out our past posts or our compliance program.