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.