Offered a Gig as an "Independent Contractor" - What Does That Mean?
So you've gotten a job offer...but the contract says you're not an 'employee', but rather you'll be an 'independent contractor'. What does that mean for you?
This has been a movement for a long time, where employers try to characterize workers in employment-like relationships as independent contractors. There are a bunch of reasons they do it, and they almost never create any benefit to the worker.
As the worker, you may not have a real choice in the matter. But it's important to understand the implications.
The Differences
There are a bunch of differences between independent contractors and employees. The most significant are that statutes dealing with 'employees' often don't extend the same treatments to contractors. Occupational health and safety obligations stay largely intact, but contractors don't get to rely on employment standards legislation (though there's one weird Ontario case suggesting otherwise), the employer doesn't have to withhold and remit your taxes/EI/CPP premiums, and the employer doesn't have to contribute the employer portion of EI/CPP premiums.
As well, while there's an implied term in employment contracts that says that the contract requires 'reasonable notice' of termination (which can be substantial), true independent contractor relationships can be terminated 'at will' unless the contract specifies otherwise. There's also an intermediate 'dependent contractor' designation that is treated differently, but I won't go much into that here.
If an employment contract says that you can be dismissed on, say, two weeks' notice, that will generally be void, and you get reasonable notice instead. Such a term, however, is far more likely to be enforceable for contractors. Meaning you have very little job security as a contractor. (There are some cases where employers want to implement an 'independent contractor' relationship simply to limit their termination liabilities, and I will say unreservedly that I think that's a terrible idea; there are better ways of contractually limiting those liabilities with contractual language more likely to hold up in a court proceeding.)
As a contractor, you'll typically be expected to register for a GST number (which is fairly easy to do) and then to include applicable taxes on your invoices to the 'client'. Then, at tax time, you'll have to account for the GST you've collected to CRA.
On your own accounting, that means that you'll be claiming as a self-employed individual. (That's assuming you haven't actually incorporated a company through which you're performing your contract duties.) At tax time, there may be expenses for which you'll properly be entitled to claim tax deductions or GST input tax credits. So keep track of your expenses. But we'll come back to the 'tax' aspects.
If you choose to enroll in the EI program for 'independent workers', you'll pay the same as you would for ordinary EI premiums. However, the CPP side of things is less rosy, because most self-employed individuals have to pay the full premium amount, instead of just half as employees would. What that means is that if you make the maximum pensionable amount in 2022 ($64,900), you will owe a whopping $6999.60 in CPP premiums. An 'employee' only pays half that, with the other half contributed by the employer.
Aside from the statutory differences, there aren't a lot of other automatic differences. Many employers have different practices for benefits - extending benefit plan participation, RRSP matching, etc. to full-time employees, but not to contractors. But there's nothing obligatory about those kinds of compensation differences.
I've had people ask before, "But if I'm an independent contractor, doesn't that mean I'm allowed to do set my own hours?" (Or 'work at other places', etc.) The answer is usually "Check your contract." While there are a few hallmarks of an independent contractor relationship, if the contract looks more like an employment contract, then the result isn't that you're allowed to ignore the 'employee' obligations in your contract; the result is that you're really an employee.
The Legal Test
Courts and tribunals have articulated slightly different tests to figure out whether a person is an employee or a contractor. In short, whether the contractor says 'employee' or 'contractor' on it is not determinative, and labour boards, courts, and tax authorities are perfectly willing to look at the actual relationship.
Put very briefly, the question is 'whose business is it?'
To get at that, we usually look at factors like control over the work, ownership of tools, chance of profit and risk of loss, and how the parties chose to characterize the relationship.
- Control over the work: Who dictates how and when the work is to be completed? Is the worker subject to discipline by the payor?
- Ownership of tools: What are the tools of the trade, and who has provided them? For an electrician, for instance, if the worker brings her own truck and $20k worth of tools, she's far more likely to be a business-owner than the worker who simply uses the larger organization's truck and tools.
- Chance of profit and risk of loss: If the worker gets paid an hourly rate, there's usually not much chance of meaningful profit beyond that. If they're paid on some other basis, then there's a chance to improve profit through efficiency. Likewise, if they're just being paid for their 'time', that's not going to have much risk of loss; but if they're incurring meaningful expenses (i.e. for materials or subcontract labour), then they're taking an entrepreneurial risk.
- Characterization of the relationship - that's where the contract itself comes in. But it's just one factor.
Why Employers Prefer ICs
Employers want independent contractors for a bunch of reasons. The biggest is that it cuts payroll expenses. Not having to pay EI or CPP premiums creates meaningful savings; it avoids requirements for statutory holiday pay, overtime pay, vacation pay, etc.
There are higher liability risks with employees, too, as on a wrongful dismissal action.
Beyond that, internal corporate policies can make a 'contractor' hire more palatable. If I'm a manager in an organization with a good benefits package, RRSP matching up to 4%, minimum 3 weeks vacation, etc...then to hire an employee for a $30/hour full-time job means paying something to the effect of an additional $8/hour for extras (including employer portions of CPP/EI premiums, vacation pay and holiday pay, and the other benefits). It's a far easier thing for my department's budget to swallow, saving some $16k/year, if I just offer a $30/hour independent contractor rate with no extras.
Why Workers Like Being ICs...and Why That's Wrong
The pitch to a worker usually goes something like this: If you sign up as an independent contractor, you can save money through tax write-offs like a real business owner.
It's a persuasive pitch.
But one of two things is really happening there, and neither should be attractive to an employee.
The first possibility is that you're actually incurring legitimate business expenses for which you're entitled to a deduction - which means that the employer is sloughing off business costs onto the worker. Using your vehicle for work purposes? Why are you the one paying for that gas? The $62,400 per year of a $30/hour worker becomes a lot less if you're driving your own vehicle 20,000km per year for work at an average cost of 50 cents per km (for gas, other operating expenses, and wear-and-tear on your vehicle).
It's not exactly a perk to say "And you get to wear down your own personal vehicle while working for us, too! (...but hey, there's a tax deduction?)"
Besides which, there are ways for employees to get tax deductions for personal expenses in employment, even if the employer isn't reimbursing them for those costs.
The second (and, from what I can see, most common) possibility is that the worker actually isn't incurring out-of-pocket expenses for the employer, and writes off personal expenses connected to a personal vehicle that's not actually used for work purposes (no, the commute to work doesn't count), or for a home office that isn't really a home office.
In a word, those claims are fraudulent, exposing the employee to potentially serious penalties if audited.
(Also, on the home office end, best to talk about it with an accountant first, because there are certain types of tax deductions you can claim on your home that have later capital gains tax implications.)
There are a few business expenses that are almost inherently legitimate, like tax accounting - but let's face it, the reason is that accounting and taxes are more complex and more expensive than if they were just employees and had a T4. (Also, incorporating a business gives more options in terms of how to structure your taxes - under some circumstances, a holding corporation can create tax-favourable choices for savings. But for most workers RRSPs and TFSAs will have better tax implications. NB: This isn't tax advice and I'd encourage folks to talk with a tax accountant about their own personal circumstances.)
Put beside the additional administrative time and inconvenience of dealing with running your 'own business', the additional CPP premiums, the loss of employment standards and job security protections, etc., any genuine benefit you get out of being an independent contractor seems...limited.
A Sum-Zero Game?
There's an argument to be made that the 'savings' of the employer can be negotiated for: It's not necessarily the case that the employee loses money on the CPP treatment; just negotiate for a higher wage to account for the additional CPP expenses, and the losses on other non-base-wage components.
My back-of-the-envelope math suggests that there's roughly a net equivalency between an employee making $62,400 per year and a contractor with an annualized fee of $71,000. If the point of the IC relationship is to save money for the employer, I'm doubtful many contractors could negotiate a 13% premium on the contract to sign as an IC. Most of what the employer saves on an IC are savings as against the worker. That's largely the point.
Qualifier
To be clear, in this entry I'm only talking about contractors in the 'quasi-employment' sense of the term. There are loads of real contractor relationships out there, but we usually don't call them 'independent contractors'; we call them 'small businesses' or 'entrepreneurs'. When I operated my own small business, I hired a guy to provide IT support. He had his own business, his own client list, and I was one of many clients whose needs he supported. He was a contractor, not an employee, but we'd never really refer to him as an 'independent contractor', because...why would we?
The reality is that the phrase 'independent contractor' uses 'independent' in a 'the lady doth protest too much' kind of way, asserting them to be independent as an overcompensation where the bona fides of the independence are dubious. In almost every scenario where we use the term 'independent contractor', the worker's 'business' consists of the labour of a single individual, working for (entirely or primarily) a singular client. If your entire business will cease to exist based on the whim of a corporate manager for your sole client, are you really independent in any meaningful sense?
Theory: Core Objections
The precise line between 'employee' and 'contractor' is vague. As noted, it's even muddier because we've created an intermediate category of 'dependent contractor'...that's still not quite an employee.
I have no doubt that the 'contractor' designation is frequently abused, and my concern is less about the test than about the fact that there's next-to-no proactive enforcement, meaning that employers get away with it unless workers in vulnerable circumstances actually step up and challenge the arrangement.
But while I tend to think that the test is more-or-less properly framed, I would suggest that there's some recalibration to be done in how it's weighted.
1. Exclusivity is a Hallmark of the Employment Relationship
It's an implied obligation of an employment relationship that an employee owes duties of loyalty and fidelity to the employer that will - under many circumstances - prohibit the employee from working for competitors.
There are exceptions. In construction trades, it's not all that unusual for employees to float between different employers. In part-time minimum wage work, it's also commonly understood that a person might have multiple jobs in the same sector.
But if an employer hires a worker on the expectation - whether arising from hours, policies, or express terms of the contract - that the worker will only work for the one organization, they're almost never looking for a genuine B2B relationship.
It wouldn't be that unusual to hire a contractor with confidentiality or non-solicitation requirements - I'll give you access to my facilities and customer base to offer services under my organization's umbrella, but in order to protect my own legitimate interests, you're not allowed to poach those customers to offer them services outside of our arrangement - consider, for instance, a rec facility hiring contractors as personal trainers, coaches, or sports professionals. It wouldn't be unheard of for the coach to have an independent business that involves coaching at multiple facilities, but for the facility to say "You can't take OUR members to OTHER facilities" would be quite reasonable.
But a non-competition agreement is a completely different creature.
To draw out the point, let's look at the difference between in-house (employee) and external (contractor) counsel performing work for a construction company. Both lawyers owe fiduciary obligations to the company. But the contractor is perfectly free to accept retainers from competitors to the client so long as the file doesn't create a conflict of interest, whereas the employee is presumptively prohibited from working for the competition at all.
If I were rewriting this area of law, exclusivity of the relationship would be just shy of determinative: An exclusive relationship would be employment outside of truly exceptional circumstances.
2. Be Skeptical of Contractors in the Same Line of Work as the 'Client'
Having acknowledged that there ARE industries where it's commonplace to hire genuine contractors to provide services directly to clients, it's something that should generally raise questions. Or if the 'contractor' is providing services that go to the core of the payor's business. (In some jurisdictions, this is a factor in the test. Not so much in Canada.)
There are a couple of reasons for this - firstly, because as a consumer, I generally expect that the individuals providing me with services on behalf of the organization are acting under the direction and control of the organization, and it's misaligned with reasonable consumer expectations and rights to add a layer of legal insulation - without the consumer necessarily being aware of it - against vicarious liability. Secondly, because if the services of the contractor are to create the core products/services sold by the 'client', is there really a second 'business' owned by the contractor?
For example, if my company develops software, and I hire software engineers as 'contractors' to write my company's code, how can we say that this arrangement reflects more than one 'business' operating?
This should not by any means be determinative. But a business hiring a contractor to provide administrative support services unrelated to its own business (like a law firm hiring an accountant to do the law firm's own accounting) is much more likely to be a bona fide contractor relationship (by contrast to an accounting firm hiring a worker to provide accounting services to the accounting firm's clients).
3. Employment Statutes are Remedial Legislation Addressing Worker Vulnerability and Require Broad Application
While engaged by proxy through the analysis of 'control', the most fundamental reason why we have a body of law called 'employment law', instead of simply rolling it into commercial contracts, is that there's a conventional power imbalance in the employment relationship.
So when we're recasting relationships in ways that circumvent the special treatments - at common law and statute - provided for vulnerable workers, without changing the underlying vulnerability that drove us to regulate these relationships differently in the first place, then that seems pretty obviously problematic.
So I'd rejig a couple facets of the test: At minimum, 'how the parties chose to structure the relationship' should be taken with a big grain of salt depending on the level of genuine choice and recognition of bargaining power imbalances, particularly with reference to the history to the worker's 'business'. If the worker did not operate a business prior to entering into the relationship with the payor, and has not meaningfully operated a business with respect to clients other than the payor, then there's a solid inference that the choice to structure it as an independent contractor relationship was driven by the payor. If the worker was carrying on a business prior to entering into the relationship, then the inference is otherwise.
Though I might go a step further and suggest that, in a case where the other factors would tend toward recognition of an employment relationship, an agreement with the effect of excluding the impact of employment standards legislation is void - treating 'how the parties chose to characterize the relationship' as a factor that can ever turn an employment relationship into a non-employment relationship violates applicable employment standards legislation.
Secondly, when one of the core questions is whether employment standards legislation should apply, that question needs to have an answer that respects the appropriate interpretation and scope of the statute. The statute was very deliberately crafted in a way that prevents parties from opting out of its requirements, and a narrow or unduly-technical construction of the meaning of 'employee' undermines its operation.
Indeed, when most of the point of designating a worker as an 'independent contractor' is specifically to opt out of legal obligations in respect of which there is no lawful opt-out, the test for whether or not a person is an 'employee' owes no deference to how the parties chose to characterize the relationship.
The test needs to simply address the characteristics of the relationship, in a broad and purposive way to address the vulnerability of workers in accordance with the overall statutory scheme.
Gig Work
The evolving question-mark in labour markets deals with the role of the 'gig worker' - the classic case being a driver for delivery and 'ride sharing' services.
Let's start by acknowledging that the traditional analogues for gig workers - like taxi drivers and truck drivers - can fit into either the employee or contractor category, depending on whether they own their own vehicle and credentials. (Many markets limit the number of taxis on the road, to prevent an oversaturated market, by only licensing a certain number. Those licenses often become an expensive asset of a taxi business, and are part of the start-up cost of a taxi business or owner-operator.)
So of the conventional categories, gig workers are likely to have two pretty significant 'contractor' characteristics: Typically, they pick and choose their own hours without direction from the payor; and they own their own vehicle. Sometimes they're even working for more than one platform.
However, there are a lot of features that work against an independent contractor characterization, too: The platforms exercise significant oversight, setting fees and service standards. There's a significant imbalance of power between the parties, to the point that the Supreme Court found part of Uber Eats' standard contract unconscionable.
The platforms will deny that they're in the business of offering rides or delivery services at all, claiming to just be a mode of connecting service providers with customers, but this is pretty disingenuous, given the nature of their branding and streamlining of service standards and prices.
The workers typically don't have a business independent of the platform(s) on which they operate. (This isn't universal. Some legit taxi owner-operators are also signed up on platforms like Uber.)
But the whole platform infrastructure is largely an end-run around taxi regulatory regimes. The concept of the ride-share is largely a fiction, but the fiction doesn't support a view of the drivers as entrepreneurs or business-owners, because if they were actually analogous to a taxi owner-operator...then they would probably BE a taxi owner-operator, and fall under taxi regulatory regimes. That's really where this scheme falls apart: They can't be independent businesspeople, because if they were, they'd be regulated differently in a way that doesn't mesh with Uber's model.
There is increasing discussion of creating additional categories to recognize 'gig work'. I regard that as a problematic road to go down.
Ontario's approach, for example, expressly STILL leaves open the prospect that a gig worker can also be an employee (and generally employment protections will be greater than gig worker protections), but applies certain protections to gig workers that would be greater than typical independent contractor protections. I think the important question to ask is this: WHY do we think that these workers are vulnerable enough to require protection from exploitative practices, but NOT the same protections that employees would get?
At least one of three things happens, in practice, with such a framework:
- The framework applies restrictions to genuine independent B2B relationships in a way that impairs their freedom of contract;
- Decision-makers will be more likely to find that a gig worker falls within this framework but NOT the employment framework, depriving vulnerable workers of substantive protections; or
- The framework will be entirely ineffective.
Conclusion
If you're looking for a 'job', and an employer puts an independent contractor agreement to you, be skeptical of it.
If you've signed an independent contractor agreement, don't assume on that basis alone that the courts, tax authorities, and labour boards will necessarily uphold the agreement.
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Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
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