Misclassification of independent contractors as employees can lead to legal lawsuits. Some upfront planning can help alleviate massive headaches in the future.
In a commonly-cited lawsuit, an independent contractor claimed to be treated as an employee because the work was supervised, and while working on this contract he did not seek business elsewhere. He claimed that while he was treated like an “employee” in many regards, he did not enjoy any of the perks that the employee would have otherwise received.
Listed below are a few distinguishing factors to help distinguish between the two:
- Permanent employees work on an on-going basis whereas contractors are hired on a project-specific basis
- Employees are provided with tools and resources to execute a task whereas a contractor uses his/her own tools and resources
- The organization is responsible for deducting taxes from an employee’s payroll every month whereas a contractor is responsible for managing his/her own taxes
- Employees have a contract of service, meaning the employer controls the amount, nature, and methodology of work to be done. Contractors have a contract for service, meaning they are hired to deliver a certain outcome, with less control over how that outcome is achieved
What is the legal risk of misclassifying employees?
If you are found to have misclassified employees as independent contractors, you may be required to pay significant penalties, interest and legal fees, in addition to outstanding payroll deductions.
Some of the costs that you may incur include the following:
- Penalties of 10% to 20% on unpaid Income Tax, EI and CPP premiums, plus interest;
- Workers’ compensation premiums, plus fines and interest;
- Unpaid Canada Pension Plan premiums (workers’ and employers’ share);
- Minimum wage, overtime, parental leave, vacation pay, and more;
- Potential claims for wrongful dismissal damages from the early contract termination.
An article in the Financial Post sheds some light with a brief overview of changes taking place for employers and contractors.
For more information, visit the Government of Ontario’s list of the proposed changes to Ontario’s Employment and Labour Laws.
Consult your legal advisors to make sure you are appropriately classifying your employees and contractors.
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