In the current economic climate, companies seeking to control costs or to acquire a more flexible workforce are turning to temporary agency personnel and independent contractors. However, as these arrangements have become more prevalent, they have been increasingly subject to challenge by government authorities, unions and, often, by the workers themselves. The issues are, in the case of independent contractors, whether these workers are actually employees, and with agency personnel, whose employees they are.
By using independent contractors rather than employees, companies avoid the requirement to remit income tax, employment insurance and CPP premiums, and responsibility for workers’ compensation assessments and health care insurance; they also are not obliged to comply with the various restrictions and obligations contained in employment legislation such as the Employment Standards Act. For unionized employers, an additional benefit is that independent contractors are not covered by the terms of collective agreements.
However, if a court or tribunal decides that a worker characterized as an ‘independent contractor’ is actually an employee, the employer may be found liable for unpaid tax, premiums, insurance, statutory notice of termination and severance pay, as well as statutory penalties and the cost of legal proceedings, among others. If unionized, it will also be bound to apply the terms of the collective agreement to the employee. Because contractual terms governing the relationship are not determinative of the issue, companies should be aware of the legal tests that have been applied to distinguish between employees and independent contractors.
THE FOUR-IN-ONE TEST
The most commonly encountered test for establishing an employment relationship is the “four-in-one test”. The components of the test are:
1. Control. This is the traditional common-law test. It has been said that the key distinction is that an employee can be told what to do and how to do it, while a contractor can be told only what to do. One observer has pointed out that the actual exercise of the control is not as crucial as the right of control. Indicators of control include remuneration by the hour, week or month, specific required hours of work, full-time work, adherence to routines and schedules specified by the company, and work at the company’s place of business.
2. Ownership of tools or equipment. Where the company provides the tools and equipment used to perform the work, this will contribute to the assumption there is an employment relationship.
3. Chance of profit or risk of loss. This addresses the issue of who stands to gain if the worker completes the job quickly and efficiently and, conversely, who bears the loss from a poorly completed job. As a rule, in an employment relationship, the employer rather than the worker will reap the benefits and incur the losses.
4. Integration. This aspect of the test raises the question of how integral the work at issue is to the operating organization of the company, and whether the person doing the work is seen as an ‘ordinary worker’ or a consultant. If the tasks performed relate to a specific project which requires unique skills, the worker is more likely to be perceived as an independent contractor.
Several authorities have commented that the test must be applied in a comprehensive manner in order to arrive at the true nature of the relationship. There is no set formula for determining which component of the test will predominate in any single situation.
Various tribunals have developed additional guidelines to determine whether a worker is an independent contractor. These include the right to use substitutes, evidence of entrepreneurial activity, the selling of one’s services to the market generally, economic mobility or independence including the freedom to reject job opportunities or to work when and where one wishes, evidence of variation in the fees charged for the services rendered, the degree of skill, expertise and creativity involved, and whether the worker renders services or works under conditions similar to persons who are clearly employees.
Similar issues arise when a company makes use of temporary personnel provided by a third party, such as an employment agency. Here, the question is not whether the workers are employees but who their employer is, and the focus of the inquiry is on the element of control.
In Pointe-Claire v. Québec Labour Court (April 24, 1997), the Supreme Court has held that, while the test of day-to-day supervision and control of the employee has been given predominance in agency personnel cases in the past, where there are two possible employers a more comprehensive test should be applied. This allows the tribunal to establish which party had the greatest control over all aspects of the work on the specific facts of each case. To make this assessment, the tribunal would examine which party has control over the selection process, hiring, training, discipline, evaluation, supervision, assignment of duties and remuneration, and would consider the element of integration into the business, among others.
In Our View
If a company uses independent contractors, it should develop written contracts which address the elements in the tests set out above, such as the degree of control, the nature of the work to be performed, provision of tools, method of payment, standards by which the work will be assessed, and the worker’s liability. In the case of agency personnel, a company must be aware that the party found to exercise the greatest control over all aspects of the work will be considered the employer, and should structure the arrangement accordingly. (See also “Required adherence to code of conduct means court interpreter is an employee, B.C. Court of Appeal rules” on our Publications page.)
For more information on this subject, please contact Andrew Tremayne at (613) 563-7660, Extension 236.