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Mischaracterizing the Independent Contractor vs. Employee Relationship

By March 15, 2011July 2nd, 2021Employment Law

In this blog, I’m going to be talking about how dentists mischaracterize the relationship they have with their workers (i.e. independent contractors vs. employees).

As noted in previous blog posts, there are important differences for both the payor and the associate when it comes to being hired, managed, and terminated as an independent contractor versus an employee.

It is in the payor’s interest to hire the associate as an independent contractor. Doing so would relieve the payor of having to collect and pay the government the associate‘s income taxes, CPP contributions, and EI premiums. Case in point, a payor hiring an associate as an independent contractor and paying them $50,000 in 2010 would save $3,208 in CPP contributions and EI premiums. Apart from these cost savings, terminating the associate could also be easier: there are no minimum standards laws or reasonable notice obligations (at common law) which must be followed to terminate an independent contractor. The agreement between the payor and the associate would generally govern. Assuming that the agreement is enforceable and followed, the payor could avoid costly legal disputes. The associate may also wish to be an independent contractor in order to make more than a fixed salary by servicing other payors or by paying less tax through the deduction of legitimate business expenses.

That said, in certain circumstances, the associate may want to be an employee. They may not want to be bothered with recording and deducting business expenses for tax purposes. They may not be able to afford their own tools. They may have difficulty marketing their services to multiple payors. They may be dependent on a regular paycheck and benefits. They may need the protection afforded to employees under the minimum standards legislation for things like minimum pay, maximum hours, vacation pay, maternity leave, and minimum notice or payment in lieu thereof.

The bottom line is that, while both the payor and associate MAY WANT to structure their relationship in a certain way (i.e. independent contractor or employee), the law MAY SAY OTHERWISE! This happens when the parties agree that the associate is an independent contractor, but this characterization gets challenged by third parties. This happens, for example, when the government believes that the associate was an employee and that, as such, the payor ought to have been making CPP contributions and paying EI premiums. The payor may be on the hook for a few years! The costs can add up quickly – particularly if the matter is disputed in court.

The characterization of the relationship also gets challenged when an associate independent contractor is being terminated without cause. Here, the payor may wish to rely upon the independent contractor agreement to terminate the associate, which may simply say that some minimal notice or payment in lieu of notice is required for the payor to terminate the associate. But the associate may decide to start a legal action claiming that they were in fact an EMPLOYEE – and thus entitled to MORE NOTICE OR PAYMENT IN LIEU THEREOF. This may end up in front of the Ontario Labour Relations Board (where the associate alleges that the payor failed to provide minimum notice or payment in lieu of notice under the Employment Standards Act, 2000) or in Superior Court (where the associate alleges that the payor failed to provide reasonable notice or payment in lieu thereof at common law). For the payor, this could cost more money than they would otherwise have to pay (e.g. legal fees disputing the matter, plus having to provide more notice or payment in lieu of notice).

As the implications to the payor and the associate are significant when it comes to how their relationship is characterized, it is a good idea to see what the courts have said on this matter when faced with real cases – which is next!

DMC