Avoiding Employee Vs Contractor Disputes

• Published date: 01 November 2022
• Subject Matter: Tax, Income Tax, Sales Taxes: VAT, GST, Tax Authorities
• Law Firm: Borden Ladner Gervais LLP
• Author: Natalie Goulard and Steve Suarez

The status of a particular worker as an employee (i.e. engaged under a contract of service) or an independent contractor (i.e. engaged under a contract for service) has many important consequences for both the worker and the employer/hirer, including:

• the obligation on employers to withhold income tax from employee compensation and remit such amounts to tax authorities;;
• premiums under the Employment Insurance Act;
• contributions under the Canada Pension Plan;
• provincial labour and employment standards laws (e.g vacation pay, holiday pay, termination pay, etc.) applicable only to employees;
• the Goods and Services Tax (GST);
• the filing of income tax returns (these differ for both parties depending on whether the worker is an employee or not);
• deductions from income (these are greatly limited for employees relative to independent contractors); and
• the tax treatment of stock options (separate rules applicable to employee stock options).

The legal consequences of mis-classifying a worker can be very serious, and particularly in today's economy, there is often considerable uncertainty on this issue. The legal test to determine whether a person is an employee or an independent contractor can be simply stated: essentially, what must be determined is whether the individual is performing services as a person in business on his/her own account.

However, simply stated, the test can be difficult to apply. The totality of the relationship of the parties has to be considered in light of the various factors identified in the case law as being relevant to this determination. Disputes principally arise where relationships have aspects of both employee/employer and independent contractor/hirer relationships, or where the arrangements are not properly understood and/or documented. Such disputes can arise because tax authorities challenge the worker's status, or where the worker him or herself does so (this occurs most frequently where a terminated worker sues the employer/hirer seeking employment-related benefits).

Hirers and workers benefit from having clearly delineated relationships, as well as systems and protocols in place to ensure their arrangements are properly understood and documented. This greatly reduces the chances of disputes with the tax authorities.

What you need to know

• The status of workers as employees or independent contractors has significant tax and employment law consequences for both workers and employers/hirers.
• The status of workers is an issue...