Reality Check: Can You Contract Out Of Being An Employer?

With great power comes great responsibility. Certainly this is true of employer-employee relationships, where the power imbalance generally tips in favour of the employer. Employers are responsible for providing training and supervision to employees, complying with minimum standards set out in employment standards legislation, deducting personal income tax from employees' earnings and remitting the deductions to the Canada Revenue Agency, deducting and submitting both the employee and employer portions of Employment Insurance premiums and Canada Pension Plan contributions, providing benefits such as vacation pay and unpaid leaves of absence, and potentially much more.

Can the responsibilities of being an employer be avoided simply by deciding to hire “contractors” instead of employees? In short: no. It's not as simple as that.

Courts apply a two-stage test to determine whether a worker is an employee or a contractor. First, the Court considers the parties' mutual understanding or common intention for their relationship. Second, the Court performs a reality check: does an objective reality sustain the parties' subjective intent?

Decisions issued by the Tax Court of Canada in the first half of 2019 provide many examples where the parties' subjective view of their contractual relationship turned out to be wishful thinking.

The case of AE Hospitality v MNR, 2019 TCC 116 involved a company who supplied workers to two closely related catering companies. The subjective intention of AE Hospitality and its 200-plus workers (supervisors, servers, bartenders, chefs) was to enter an independent contractor relationship. However, the Court found the facts did not substantiate that intention (at para 158):

The factors assisting in determining if a worker is an employee or an independent contractor, namely the control, the chance of profit and risk of loss and the integration factor all point to an employment relationship. In my view, the workers are not operating a business on their own account. The only parties that are operating a business and bear business risks are AE and the catering companies.

AE's workers were found to be employees, and AE was found to be a placement agency responsible for those employees under the Employment Insurance Act (“EIA”) and the Canada Pension Plan (“CPP”).

Similarly, in 9178-3472 Québec Inc. v MNR, 2019 TCC 15 the Court found over 200 workers who distributed free24 HEURES newspapers in Montreal subway stations were in...