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Independent Contractor Agreements

Independent Contractor Agreements


What is an independent contractor?

Naturally, some individuals that companies “hire” for work are not employees, they are independent contractors. Independent contractors might include consultants, lawyers, or financial professionals. They usually have a much higher degree of control over when and how they do their work compared to employees.

What are the benefits of hiring independent contractors over employees?

The main advantage – which applies to both the company and the contractor – is the tax benefit. Independent contractors typically do their own taxes and make their own deductions, meaning that in most cases the contractor will simply invoice the company for work, plus HST. The normal employee deductions and “added costs”, like vacation and holiday pay, employment insurance, CPP, and even WSIB, may be either borne by the contractor or simply not applicable.

Another company advantage of hiring independent contractors is the flexibility it affords. Contractors are typically not entitled to notice of termination, meaning they can be added and removed at will and according to business needs (however, this is subject to some very important caveats, below).

What are the drawbacks of hiring independent contractors?

One drawback of hiring an independent contractor is that the company may not be able to exercise the same degree of control over the contractor’s work, compared to an employee. If the company attempts to do so by, for instance, regulating when, where, and how work is completed, that individual may lose “independent contractor” status (from a legal perspective).

This leads to the second main drawback of hiring independent contractors, which is regulatory risk. Independent contractors who are found by an adjudicator to be in fact “employees” are entitled to all of the associated employment benefits, such as vacation pay, holiday pay, as well as termination and severance pay. As well, recent amendments to the Employment Standards Act make it an offence to mis-classify an employee, for which fines can be charged. This can lead to large, unexpected costs for unwitting companies.

Are independent contractors ever entitled to severance pay?

As described above, contractors can be entitled to severance if they are described as contractors but are employees in actuality. There is also a third, intermediate class of workers called “dependent contractors”; they are not employees per se, but they have a high degree of economic dependence on one “client”. Dependent contractors, when dismissed, are entitled to sue for wrongful dismissal.

What are the distinguishing marks of employees versus independent contractors?

Courts and tribunals do not care what a written contract stipulates, or how the worker files their taxes. They look at the specifics of the relationship to determine if the worker is an employee or an independent contractor. Independent contractors typically:

  • Provide the tools and equipment for the job.
  • Can make profit and risk losing money from the work (aside from simply earning or not earning wages).
  • Have overall control over when, how, and where the work is completed.
  • Have the ability to subcontract or hire others to complete the work.

Are there ways to limit the company’s liability through written independent contractor agreements?

Yes, absolutely. In some ways, an independent contractor agreement is a hybrid between a commercial agreement and an employment agreement. It must set out the terms and conditions of the engagement clearly and succinctly, while limiting the potential for regulatory risk in the event that the worker is found to be an employee.

What can Forensic Restitution do for my company?

Forensic Restitution skills and experience put us in an optimal position to advise companies on the practical considerations of using independent contractors. Contact us today.

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