Employers in Ontario are faced with a decision to make: hire employees or independent contractors.
There are benefits and challenges to each; however, from a legal perspective, there are important distinctions that may have lasting effects on your business. The classification of employee vs. contractor impacts worker’s entitlements and employer responsibilities under the law. In this article, we will explore the differences between employees and independent contractors, why this matters in Ontario, what happens if you misclassify your employees and some best practices to follow.
Key Differences: Employees vs Independent Contractors in Ontario
Before deciding whether employees or independent contractors are right for your business, it is important to understand the differences between the two and the implications of each. Not correctly classifying your workers can lead to large fines and penalties.
Who is an employee?
Employees work under the control and direction of employers. They are typically well-integrated into the organization and may not have control over their working hours and where they work. However, employees are afforded certain rights and benefits laid out in the Employment Standards Act, 2000, which aims to protect workers in Ontario. This includes minimum wage, hours of work, entitlement to breaks, vacation pay and more. The responsibilities required for employers when hiring employees sometimes lead to organizations opting only to hire independent contractors or incorrectly classifying employees to avoid their responsibilities.
Who is an independent contractor?
Independent contractors are workers who provide a service to clients for compensation; however, they are not under the same control and direction as employees. Independent contractors control their own hours, use their own tools and are responsible for completing the work. While independent contractors are afforded more freedom, this also comes at a greater risk. They may incur losses if a job is not completed properly and they are not afforded the same rights as employees under the Employment Standards Act.
There are many different things to consider when classifying a worker as an employee vs. a contractor. We compiled some helpful questions you can ask yourself that will help you classify your workers.
| Questions | Employees | Independent Contractors |
| What level of control does the employer have over their work, timing and location? | High control over where and when work is completed; superior and subordinate relationship. | Minimal control over where and when work is completed; business relationship. |
| Can they work with multiple employers? | They work for one employer. | They can work for many employers or companies. |
| Are they critical to business operations? | They are typically essential to the daily operations. | Their work is not integral to the business. |
| Is the agreement permanent? | They do not have an end date. | They typically have an end date or specific project to complete. |
| Are they entitled to benefits? | They are entitled to employment benefits and protections, including minimum wage and vacation pay. This may also include a benefits plan. | They are not entitled to the same benefits and protections afforded to employees. |
| Are they compensated on payroll? | Employees are compensated by payroll either hourly or on a salary basis. | Independent contractors submit an invoice for compensation based on work completed. |
| Who owns the equipment? | The employer or company owns the equipment needed. | The contractor owns their equipment. |
The determining factors are related to the intent prior to entering a relationship with the person and the degree of control the employer has over the worker. An employer has more control over an employee; however, an employer and independent contractor enter into a business relationship. It is important to speak with an experienced employment lawyer prior to creating a contract with a worker to help you avoid large fines or penalties for improper classification.
Contact Epstein & Associates for your free consultation.
Why Proper Worker Classification Matters
For employers:
Incorrectly classifying employees as independent contractors can lead to legal and financial consequences. These may include penalties, payment of back wages, and liabilities in case of workplace accidents. This may also result in damage to your reputation, leading to a loss of trust from employees and clients.
For workers:
Understanding your classification is essential to know your rights, especially regarding taxes, benefits and protections under employment law. Misclassification can lead to loss of benefits and protections or even unexpected taxes.
Employer Liability: Penalties and Fines
Employees in Ontario are protected under the Employment Standards Act, 2000. This legislation sets minimum standards for employees in Ontario, including wages, hours of work, vacation time, and leaves of absence. Independent contractors, however, are not protected under this act, so the employer’s responsibilities towards employees do not apply to them.
If an employer violates the Employment Standards Act, 2000, they may be ordered to pay wages owed to the employee, prosecuted or face civil lawsuits.
The determining factors to classify a worker as an employee or an independent contractor are not necessarily directly related to the wording within the contract. Courts will look beyond the wording in a contract to take into account the nature of the relationship between the worker and employer to determine the classification of the relationship. In Baker V. Fusion Nutrition Inc., 2022, the court determined despite the contract identifying the plaintiff as an independent contractor, the employer had improperly categorized their relationship. The plaintiff was awarded $70,000 in damages due to this misclassification and termination of their contract.
Best Practices for Employers & Workers
Employers:
- Regularly review the status of your workers and ensure they are properly classified.
- Draft clear contracts for employees and independent contractors that clearly outline the nature of the relationship.
- Consult with an experienced employment lawyer prior to drafting any contracts and for legal advice if you have uncertainty about a worker’s status.
Workers:
- Understand the different classifications of workers and familiarize yourself with the Employment Standards Act, 2000.
- Negotiate your contract to ensure it matches the true nature of your relationship.
- Seek legal advice if you are unsure about your status or need assistance reviewing your contract.
The classification of workers as employees or independent contractors in Ontario is complex and, if not done properly, can have serious consequences for both employers and workers. Both employers and workers must understand and correctly classify workers. If you ever have doubts about the classification of a worker, contact an expert in employment law. Remember, the consequences of misclassification can be significant, and it is always better to be proactive. Contact Epstein & Associates for your free consultation.
This blog is made available by the law firm publisher, Epstein & Associates, for educational purposes. It provides general information and a general understanding of the law but does not provide specific legal advice. Any specific questions about your legal concerns please contact us now and speak to an expert today.