Independent Contractors and the Law

The distinction between an employee and an independent contractor is especially relevant when source deductions are concerned. As noted earlier, an employer must make certain deductions and remittances from the salaries and wages of its employees for amounts owing for employment insurance (El), the Canada Pension Plan (CPP), and income tax. In addition, the employer must also make employment insurance and Canada Pension Plan payments on behalf of all employees. In the case of an independent contractor, an employer is not required to make either any source deductions or contribute anything on the contractor’s behalf. This situation provides a further incentive to employers to engage independent contractors rather than hire employees.

Yet difficulties sometimes arise for small business owners when Revenue Canada becomes aware of an independent contractor situation, as often happens when a contractor is terminated or the contract ends and the contractor applies for employment insurance benefits. Despite what the independent contractor might have agreed to with you, to obtain employment insurance he or she will often describe himself or herself as having been your employee. It is then up to you to prove that such was not the case. In other words, the legal assumption will be made that he or she was your employee.

As a consequence, it is likely that you will be assessed by Revenue Canada for amounts owing under El and CPP legislation, on the premise that the person who you say was an independent contractor was really your employee. Moreover, you will be required to pay to Revenue Canada both the amount you should have deducted from the “employee’s” salary and the amount you should have contributed on his or her behalf. That can come to quite a bit of money. Moreover, if you are unable to pay it immediately, you will be required to pay interest and penalties until the time you have paid it in full.

To challenge the assessment, you may need to go to tax court and appeal the decision. At that point you must be able to prove the independent contractor status of the person who, at law, will be assumed to have been your employee. As you might expect, this can often be difficult.

How then should you deal with people who truly are independent contractors? There is no simple answer to this question. In certain industries — hairstyling, for example — legislation exists that makes every hairstylist an employee of the hair salon, regardless of any other agreement between the parties. Such legislation aside, your only course of action is to ensure that the person satisfies the legal indicia of an independent contractor. In addition, a written independent contractor agreement is a must. It should explicitly require the independent contractor to make El, CPP, and income tax payments on his or her own behalf and indemnify you if he or she doesn’t. To minimize your potential liability, I strongly recommended that you obtain qualified legal advice whenever engaging an independent contractor.

Employment law tends to develop at an astonishing pace. Keeping up with what you are obligated to do to comply with the law requires some effort on your part. Contact the employment ministry in your province to determine any specifics; the ministry will have brochures and pamphlets to assist you. You should also contact your lawyer if faced with a problem or issue that you are uncertain how to resolve.

Source: Swais, N. Canadian Legal Guide for Small Business. Self Counsel Press. 1999 Vancouver