If it walks like a duck, quacks like a duck and looks like a duck, chances are it’s a duck. While not the law, these words do set out a fundamental legal concept. An employer cannot simply call an employee an independent contractor and possibly hope to be able to avoid their legal obligations towards that individual.
Companies may try to persuade an obvious “employee” to sign an agreement that describes that person as a contractor. The apparent motivation to the individual is that payments of what would normally be salary less tax and other source deductions are made as gross income payments.
The “employee” may be encouraged to incorporate a separate company to receive the “salary” sum. He may believe that he will be allowed tax deductions that employees are not allowed to declare.
The company may mistakenly believe that it can escape statutory obligations owed such as vacation pay, overtime and minimum termination obligations, and also set out a modest termination payment.
This scheme will inevitably lead to chaos. Canada Revenue Agency takes an aggressive position to such tax avoidance plans as does the Ontario Ministry of Labour. Such an agreement will lead to a tax re-assessment to both parties, likely penalties to the employer for failing to make source deductions, a denial and a repayment obligation of tax deductions claimed by the “employee”, and unpaid Employment Insurance premiums and Canada Pension Plan repayments by both parties. Tax assessments may date back 6 years. The liability may be enormous. It may even lead to a claim for unpaid vacation pay, statutory holidays, and termination pay enforced by the Ministry of Labour.
This is not to say that the parties cannot legitimately agree to form a contractor relationship. What is not allowed is treating a clear employment relationship as that of an independent contractor.
The Test for Success
At one time, the CRA mandated multiple sources of income and set a maximum of income from one contract as 65% of gross income from all sources. This is no longer a firm rule but it does, nonetheless, reflect the essential test used by CRA, namely, to show multiple sources of income, in order to demonstrate that there really does exist an independent business at the heart of the relationship. It will also help the cause to show that the business in question has hired other persons, even part-time staff, to show again signs of a truly independent business.
What is to be avoided at all costs is a context where 100% of the income comes from one source by working a 40 hour week on a regular basis and there is no ongoing apparent search for other sources of income.
Get Legal Advice
Preventive advice in this context is worth every minute of time spent. A review of such a proposed agreement can save you many heart aches. If your employer is insisting on altering your terms of employment to such a contract, this will likely make available to you an argument that your employment terms are being fundamentally changed. This could lead to an argument of “constructive dismissal”, that it is, the conduct of the company is constructed to be the same as termination. You need be bullied into accepting such an agreement.
Should you be considering an independent business arrangement, get advice and let us guide you through the steps to success.