Legally speaking, workers are generally classified into different categories. These classifications have very significant implications on a number of rights that workers are entitled to.
Whether you are considered an employee of a company or considered to be a contractor affects things like how you file your taxes, your liability for accidents that happen in the course of your workday, and the amount of notice, pay in lieu of notice, and/or severance pay that you are entitled to if your working relationship is terminated.
In addition to the differences between employees and contractors, there are also distinctions made between workers who are determined to be independent contractors vs. workers who are determined to be dependent contractors, a separate legal class of worker. Below is an outline of the differences between these classifications to help you identify where you fit and what your classification means for you:
It is likely that the most common working relationship is that between employees and employers. Employment relationships are governed by the Employment Standards Act (the “Act”). As such, employees enjoy the benefit of rights that are guaranteed by statute. There are a number of such rights guaranteed, including the right to sick days, the right to vacation pay, the right to take leaves of absence for a number of reasons, and the right to receive notice, or payment in lieu of notice, when one’s employment is to be terminated without cause.
The Act guarantees that every employee whose employment is terminated without cause is entitled to a minimum of one week’s notice, or payment in lieu of notice, for every year that they have been employed by their employer. However, the minimum amount of notice, or payment in lieu thereof, guaranteed under the Act is capped at eight weeks for employment lasting eight years or longer.
Keep in mind that the amounts of notice guaranteed by the Act are only the guaranteed minimums. Unless you have signed an employment agreement that specifies that, upon termination without cause, you are only entitled to the statutory minimums guaranteed by the Act, you may be entitled to significantly more in the eyes of the court.
Unless an employment agreement restricts your entitlement to the minimum notice requirements guaranteed in the Act, a court will apply the common law to determine how much notice you are owed for being terminated without cause. There is no set formula for determining how much common law notice one is entitled to, but employees are often granted between three- and six-weeks’ notice, or payment in lieu thereof, for every year of their employment.
Independent contractors are different from employees in a number of ways. For one, independent contractors are not expected to develop the majority of their time and attention to one employer; they run their own business and are free to provide services to multiple clients at once. As business owners, independent contractors enjoy the benefit of being able to deduct certain business expenses from their earnings when they file their taxes.
On the other hand, independent contractors do not get to enjoy any entitlement to the benefits or protections that are guaranteed to employees under the Act. If somebody wishes to fire an independent contractor, they are free to do so at any time without owing anything to the independent contractor, other than outstanding payments for work already completed. As such, a party terminating their work relationship with a worker will often attempt to have that worker classified as an independent contractor, rather than an employee.
In determining whether a worker is an employee or a contractor, courts evaluate a number of factors, including whether the worker provides their own tools, whether the worker assumes any risk of loss or has the opportunity to profit from the business being undertaken, and whether the worker has the freedom to work for a number of clients or must provide services to one client/employer exclusively.
Recently, the courts have determined that there is a third class of worker, which does not fit into either category of employee or independent contractor. A dependent contractor is a worker that is not an employee, but whom is still considered to be economically dependent on the company or individual that they work for.
The most important difference, legally-speaking, between dependent and independent contractors is that the courts have ruled that dependent contractors are still entitled to reasonable notice, or payment in lieu thereof, if their services are no longer going to be required by the company or person who has hired them.
Until recently, the test for determining if one was a dependent contractor looked at the duration of the work relationship, the closeness of the business relationship, and the degree of exclusivity of the relationship.
It was never required that the business relationship be entirely exclusive, but the contractor had to show that they relied on the business from that specific client. Presumably, if one contract accounted for 35% of your total business, you could say that you relied on that contract. However, recent case law has specified that in order for a contractor to be dependent on a particular business relationship, it must make up at least 50% of their total business.
The takeaway from this is that, if you are in business and substantially rely on one client that accounts for less than half of your total business, you may want to request that this client enter into an employment agreement with you, so that you will receive the guaranteed benefits and protections of the Act, as well as those of the common law.