

The Perils of Independent Contractor
Status
During a
recent presentation to an innovation centre, a discussion turned to the various
employee classifications (full time, part time, casual etc.) and it came to the
discussion of classifying an individual as an independent contractor. Before
this, it had been outlined how reaching the point to bringing people into the
business was exciting however carried obligations (i.e. WSIB, Payroll Tax).
A
participant asked the question that given the sometimes-cumbersome nature of
having employees and we were in a gig economy why not utilize freelancers
{independent contractors} to get the work done?
For those
who may be unfamiliar with the term, a gig economy is a free market system in
which temporary positions are common and organizations hire independent workers
for short-term commitments. The term "gig" is a slang word for a job
that lasts a specified period of time. (https://whatis.techtarget.com) HR usually
refers to these workers as part of the overall term “contingency employees”.
The
response to the participant, as it is to consulting clients, is while this may
be attractive and can work in some situations, it must meet the threshold that
defines independent contractor or they may not be in compliance and potentially
face costs and consequences if the individual has been deemed to have been
misclassified.
In the SME,
utilization of gig economy/contingent workforce is significant. For cost, convenience,
and capacity. The uncertainty of cash flows and requiring individuals for short
term timeframes plus the reduced employee overhead costs make this an
attractive relationship type. Larger organizations of course have their
independent contractors, which may or may not comply. In the HR consulting world,
where we deal with many SME’s, the topic of independent contractor is addressed
quite often.
The voices
of SME employers are certainly heard regarding the perceived unfairness of
utilizing independent contractors. Many have had independent contractors with
them for years and the individuals classified as this enjoy the relationship,
for many reasons including the tax perks. This argument for looser constraints
has its merits, however the avenue for that debate is elsewhere and not here,
the goal is to educate and provide the thresholds to measure the arrangement.
The
Canadian Revenue Agency and Ontario Ministry of Labour have stepped up their
efforts to identify misclassification and it has resulted in sometimes
substantial claims against organizations, large as well as SME.
The litmus
test for independent classification can be summarized as follows.
Control Test-
How much control is over their work (when, where, how)
Can they hire others to do work ?
Is there a formal reporting structure?
If no autonomy in these matters, they are an employee
Risk Test
Do they have any expectation of profit or could incur financial
loss (i.e. not being paid for services rendered?)
If no risk, they could be an employee
Organization integration test
Are the services an integral part of the business?
E.g. someone who writes the company newsletter is less
likely to be considered an employee than a Sale Rep
Durability and exclusivity of relationship
Are they exclusive to the
organization? (Don’t work for anyone else and the
expectation is they don’t work for anyone else)
If the parties perform work over long periods of time and
has no other clients that can be viewed as an employee- employer relationship
Tools and Resources Test
Does the individual use their own tools or the companies?
(Laptop, cell phone, photocopier)
Other elements include the nature of participation in
company events (i.e. do they attend staff meetings, Christmas party, other
company- sponsored events)?
A concrete written agreement needs to be in place that
specifically outlines the what each party expects form this working arrangement
as well as incorporating the above pieces so their can be no doubt that this is
an independent contractor arrangement. This is
a BUSINESS SERVICES agreement NOT an EMPLOYMENT CONTRACT. As for any
other company vendors, the organization has the same for this.
Another key component for this is the actual practice. As
with policies and procedures, it is great when you have them, but if you don’t
practice them it will not be worth the paper they are written on. Many a litigation
has concluded that the rules, procedures expectation while there for everyone
to see, was not followed and a situation where an employee was terminated for
violation was unjust because of lack of adherence to those policies. As with
independent contractor arrangements, consistently following the parameters is a
must. If ever challenged, the substance
of the relationship (what it was like in practice) would be looked at more than
what was on paper.
So, what does independent contractor look like in the COVID
era alongside the gig economy? Predictions are this will increase at least in
the short term as organizations weather the economic fallout from COVID and
adjust to conducting business in the “new normal”.
As of now, no legislation has been relaxed with the use of
independent contractors and no indication that this will change.
Organizations that enter into these arrangements are well
advised to stringently review if it will pass the litmus test, the risk if
reviewed is still present and the agencies overseeing this are very proactive
in their search for arrangements that do not meet the threshold.
Wouldn't it be a good idea to create a course?