Think you’re cutting staff costs with a contractor? Think again

It is one of workplace law’s newest phenomena, but it is also often a charade: Employers, happy to unburden themselves from the various costs and liabilities associated with hiring and managing a work force of employees, are increasingly retaining “contractors” to perform much of the same work that their employees did before.
And these employees in disguise, who are content to pay far less tax by simply calling themselves contractors, are not about to complain. However, when the music stops and these arrangements are challenged, sometimes many years later, courts, labour tribunals and government agencies are usually inclined to find that these contractors were truly employees. No surprise there. The arrangement represented little else than a label. What really matters is how the parties behaved.
To transform an employee into a contractor, both sides go to great lengths, preparing fancy legal agreements and incorporating separate companies to act as notional intermediaries. Some employers make deals with their workers to fire them as employees and then rehire them as contractors shortly afterward, thinking the act of termination and re-engagement as a contractor will somehow trick the Canada Revenue Agency into agreeing that this arrangement was not just an act. But the work performed by these contractors is usually exactly the same work that was previously performed by employees. What happens when these arrangements fail?
Furniture retailer La-Z-Boy recently rolled the dice and lost after an appeal court declared that Gordon Braiden, one of its commissioned sales agents, was truly an employee.
Mr. Braiden, a 14-year company veteran, was made to sign annual independent contractor agreements stating that he was an agent of La-Z-Boy and no longer an employee. The contracts each stated that Mr. Braiden could be fired as a contractor, with only 60 days’ notice – far less than he would have received if he was an employee.
When Mr. Braiden was fired a number of years later, he challenged La-Z-Boy’s agreements in court and won. The court confirmed that the true test is not what a signed agreement states but rather the nature of the employer’s control and the employee’s vulnerability in the relationship. Here, not much changed after Mr. Braiden was ostensibly transformed into a contractor, since La-Z-Boy still controlled much of his day-to-day job. Therefore, despite his label, the court still found him to be an employee.
Similarly, real estate agent Elizabeth McKee was viewed as an employee by a court even though she signed a contractor agreement, had her own incorporated business and invoiced her principal for commissions. After a falling-out which cost her her job, Ms. McKee sued her principal, arguing that she was actually an employee. The fact that she operated a business within her work for the company did not mean she was a contractor, nor did the fact that she hired and supervised her own staff. Since she worked for 18 consecutive years exclusively for her employer and had become an integral part of its business, the court declined to uphold the contract and characterized her as an employee. She was then awarded nearly half a million dollars in severance.
When the work being performed is the same and the employer still controls much of the worker’s activities, then simply labelling a worker as a contractor is not dispositive even if he or she agrees. This exposes employers not only to severance liability, but also to government audits for taxes, back taxes, unremitted employment insurance withholdings, and a number of other serious regulatory claims.
If you want to employ or be employed as a contractor, then consider the following advice:

  • Ensure that there is a clear separation between the employer’s business and the contractor. Permit the contractor to perform services for others and to maintain genuine discretion over how and when he or she performs the job. True contractors are permitted to perform the job in the manner they see fit.
  • In appropriate cases, use a third-party company to act as the notional employer. These companies are becoming increasingly relevant, and most are adept at designing an arrangement that will hold up in court.
  • Ensure that contractors do not receive any of the benefits given to regular employees, including health benefits, statutory holidays and overtime pay. Providing them with company business cards, corporate voicemail and website biographies are common human resource errors.
  • Do not allow a contractor to continue in the job indefinitely. Courts and government tribunals tend to focus mostly on permanency and dependency in declaring whether a contractor is truly independent. The longer he or she stays, the more likely he or she will be viewed as an employee.

Author: Daniel Lublin
Publication: The Globe & Mail