Posts Tagged ‘risk of profit or loss’

Employment Relationship: Employee vs. Independent Contractor – Part 2

Saturday, June 6th, 2020

Who decides the true nature of employment relationship: employer, employee, CRA, courts? What test is applied to determine whether a person is an employee or an independent Contractor? This lecture provides answers to these questions.

Please review this link to understand CRA’s position on this issue:

This lecture is taught by Amer Mushtaq, LL.B., M. Engineering , B.Sc. (Hons.), who is the Principal and Founder of the law firm, Formative LLP. Through his YouTube channel, YouCounsel,

Amer shares practical advice from his years of legal experience to help anyone access justice and achieve their goals. Subscribe today to learn more.

Amer also offers in-depth courses (by paid subscription) on various legal topics through


Show Notes:


Lecture Slides:

Machine Transcription:

Welcome everyone. This is Amer Mushtaq from YouCounsel.

Today I will talk about the difference between an employee and an independent contractor. We have done a lecture before—which was Part 1of this series, in which we had discussed the implications of being found to be an employee or an independent contractor or dependent contractor and we have talked about it. We promised that we will do a lecture on how do you determine whether you are an employee or an independent contractor. This lecture deals with that. Before we begin, we will start with the Disclaimer that this course is not legal advice. If you have any specific questions, please contact your lawyer or paralegal.

First question that comes to mind is who gets to decide whether you are an employee or an independent contractor? Is it the employer of the company that you want to work for or you are working for? Do they get to decide what is your status as an employee or is it you the independent contractor? If you wish to be termed as an independent contractor, do you have that choice? In the nature of that relationship, is it the Canada Revenue Agency (CRA) that gets to decide whether you are an employee or an independent contractor? Or is it WSIB (Workplace Safety and Insurance Board)? Do they get to decide? Or other entities like Employment Insurance Act, Canada Labor Code, Ministry of Labor or Canada Pension Plan— all of who have stakes in the decision whether you are an employee or independent contractor. Who gets to decide what is and how your relationship will be defined?

Ultimately it is the courts. So the court has the final authority to decide whether the nature of relationship is that of an employee or of an independent contractor. So if courts get to decide, what is the legal test? How do courts decide the nature of relationship? This legal test has different names. Often it’s called Control Test—actually most often it is called Control Test. Sometimes it’s called Integration Test. Sometimes it’s called Business Organization Test. Whatever the name may be, what is the purpose of this Test? The purpose of the test is to decide whose business is it. If you are claiming to be an independent contractor then is this really your business or not that’s what the court is trying to get to.

In order for the court to decide the court considers or applies a four-fold test and that four-fold test has these components. (1) What is the degree of control over you, if you are claiming to be an independent contractor by the company that you’re working for? That is one consideration. (2) Who owns the tools—the ownership of tools? By tools, I mean if you require let’s say a laptop to provide your services—do you use your own laptop or does the company provide you with that laptop? That is what we will talk about in a bit more detail. (3) Whether you have a chance of profit from this engagement this work that you will do for the company or this entity. (4) Whether you undertake any risk of loss if you are not able to deliver or if you are not getting any work? Are you losing any money? Those are the four components of the Test and in application of these, in order to find out how all of this plays out, the court looks at a variety of factors that relate to your circumstances/that relate to your nature and scope of your employment or work relationship.

We will talk about each of these factors briefly. This is not an exhaustive list. There could be many, many, more factors but this will give you an idea of the kind of things that the court considers. (1) whether your position is permanent or contractual or are you there only for 3 or 4 or 5 months and at the end of that contract the relationship ends. Or are you working on a permanent basis with that company? (2) Are you a full time employee or are you part time—really is your relationship full time or part time? That is a consideration. (3) Are you allowed to work for other entities? Can you have multiple tasks from multiple companies at the same time? Let’s say a general contractor may be working on three or four houses at the same time or may have lined up other work and maybe allocating his or her resources based upon all kinds of commitments, with all kinds of companies. If you are working for just one entity (only one company) then that sounds more like an employment relationship than an independent contractor relationship. (4) What is your relationship? Do you occupy a key role in the business? Is your title C.F.O. of the company? If that is the case, then that sounds more like an employment relationship not an independent contractor relationship.

(5) What about your work schedule? Who gets to decide your hours of work? If the company that you’re working for, dictates that you have to show up at nine o’clock and work till five and you have 2 breaks in between—that is a lot of control over your scheduling, which indicates more like an employee relationship than an independent contractor relationship. Keep in mind that when I am talking about all of these factors not one factor is determinative. If we are talking about key role in business—I personally know some lawyers who work as general counsel on a part time basis for a number of companies as long as there’s no conflict of interest and they may be able to do that as an independent contractor even though the role is a key role in the company. Not one factor is determinative. The court is going to look at all of these factors and see what kind of theme arises out of these factors and what kind of relationship comes to surface. Work schedule is an important factor.

(6) Then the court will consider the location of work. Are you required to show up at a certain location and work from there? Can you choose different locations of work? Can you do some work from the office? Can you work from home? Can you work from another country? That’s a factor to consider. (7) Ownership of tools—which I touched upon here earlier is about who gets to bring in and who owns the tools of work? For instance, if you are a plumber and you are doing a job at one place you will generally bring your own tools—you will have your own van and you will have all kinds of plumbing tools that you use in providing your services to an entity or a person or a company. Ownership of tools is relevant. It depends upon the kind of work you do. I mean you may just be doing consulting work. For instance, if you are an engineer and you provide certain designs. Are you using your own software? Do you own CAD (the computer design software)? Then do you create the models on your own software, on your own laptop and then deliver the work product to the company? Are you actually utilizing all of the company tools—tools include all kinds of things. Are you provided with a desk? Are you provided a phone? Are you provided a computer, a uniform or are you provided safety boots? You know all of these things are considered tools. Who owns the tools? If the company for which you are providing services owns the tools and you don’t own those tools then that kind of indicates a relationship as an employee relationship not as an independent contractor relationship.

(8) What about company meetings? Are you required to attend all of the company meetings whether they are administrative or whether they are operational in nature? If that’s the case, then that sounds like an employee relationship. An independent contractor may attend meetings here and there based upon his or her project—but would not be attending routine meetings within a company. That is another indication.

(9) What about your remuneration. As you know as an employee you get a salary. Your remuneration is fixed whether you do a good job or a bad job—you still get your salary and the employer is actually taking the risk on you and hoping that you will deliver and you will be worth the money that is being paid to you. As long as you are employed (until the last day of your work) you are entitled to your salary. In an Independent Contractor relationship your remuneration may not be fixed. It may depend upon what product/s you deliver and whether you deliver it on time. The scale may be different and that reflects the relationship as an independent contractor. (10) What about group benefits—if you are an employee, generally employees get group benefits, medical, dental, short term / long term disability. Independent contractors usually would have to own benefits if they will like to benefit from that kind of plans but would not generally be under the company’s benefits plan. (11) What about your ability to hire and fire employees for the company? If you can hire and fire employees for the company, then you’re providing services that show that the relationship is that of an employee not an independent contractor. On the other hand if you’re an independent contractor, can you subcontract the work? Or can you send somebody else in your place? If that is the case then you are acting more like a company, acting more like an independent contractor. That is a factor that may show that you are an independent contractor.

(12) What about your ability to manage a company’s employees. If you are managing a company’s employees, i.e., if you’re writing the evaluation reports, if you’re doing their scheduling, that sounds more like an employment relationship. You sound more like a manager of the company as opposed to an independent contractor. (13) What about paid vacation? If you get paid vacation—usually employees get paid vacation not independent contractors. (14) What about financial risk—financial risk is important. Do you have any risk in this relationship? Sometimes when independent contractors are running operations they have costs to run their own operations. For instance, they may have their own office, they may have internet, they may have phone connections, they may have other software licensing and what not. Whether you are getting paid from a company or not, whether you have a contract or not—you are paying those expenses and there is a risk that you may not get contracts, you may not get some job and you still end up losing money. There are financial risks associated with independent contractor work. Generally speaking there are no financial risks for an employee. Employee is entitled to his pay regardless of whether the employee delivers or not. (15) Do you have any flexibility in deciding how the task that is assigned to you has been completed? Let’s say if you are an independent computer programmer and the company comes to you and says we need software that records our customers’ data. Then you are let loose. You go and decide based on the framework that is provided to you, based on the requirements of the company, you go and decide how that software is developed. There is a lot of flexibility in that but if you are an employee you have limited flexibility—you are being questioned at every single step. You have to follow specific directions in terms of what is required of you. (16) Are you allowed to work for others? If you can work for multiple entities then that sounds like an independent business—like an independent contractor relationship. If you are working for only one company that sounds more like an employee relationship. (17) What about intention of parties? This is where your intention comes into play. When you were hired or if you are negotiating an agreement or contract with a company, what is the stated intention of you and the company that you want to work for. If both of you are agreeing that this is an independent contractor relationship, the court will consider that. That’s not a deciding factor but the court will take that into account and consider why you chose to label yourself or your relationship as an independent contractor relationship. It is a factor but not the deciding factor.

I want to go back quickly to all of these factors and say that all of these factors are considered and then there will be a theme that will emerge. Not one factor is determinative of the relationship. When the court considers all these factors and there are many, many more—how do they apply the test?

The one thing I want to tell you about is the application of the Test (there is a spelling mistake it is Test not text). Flexible approach towards the application—what I mean by flexible approach is that if there are twenty factors the court has considered, it is not going to be that if 12 out of 20 show a check mark of independent contractor relationship then you are an independent contractor. It is not done in that fashion. The Tests are applied—all the factors are considered and then the court will see whether a theme emerges. Does the relationship look like an employment relationship or an independent contractor relationship?—and that is how the court will apply the Test.

Another important part and very important part to keep in mind is that the application of this Test is Purposive. And what do I mean by that? I’ll give you an example. So the Court may be considering whether you are an employee or an independent contractor with respect to some specific legislation. So for instance if C.R.A. has claimed that your tax deductions were improper because you were not an independent contractor but an employee, then the legislation that is being interpreted is the Income Tax Act. If you have filed a complaint with the Ministry of Labor that you should have been entitled to vacation pay / a public holiday pay because you were an employee, then the legislation that is being interpreted is the Employment Standards Act (ESA 2000) which is in Ontario. When I say purposive—what the Court does is, it looks at the purpose of that specific legislation—and then decides based upon that purpose whether you are an employee or an independent contractor. Why is that important? I’ll give an example. Employment Standards Act, Employment Insurance Act, Workplace Safety Insurance Act (for WSIB matters), Occupational Health and Safety Act and Canada Pension Plan—all of these legislations have a lot of rights for employees. They are designed for the protection of employees. When the courts are interpreting those legislations which are for the benefit of employees the court looks at the definition of employee more broadly and tries to capture as many people as possible so that they can benefit from that legislation—the protection of that legislation. That is why a person may be considered by the Courts as an employee when the court is interpreting Employment Standards Act or Employment Insurance Act but may consider you as an independent contractor if it’s considering the Income Tax Act. So one person could be defined as an independent contractor for the purposes of one legislation and as an employee for a different legislation. That is how these Tests are applied in a flexible way and in a proposal way.

A quick summary: Generally speaking if you have no financial risk in this relationship, if you work under very specific control and direction of the company that you work for and you work for one company the chances are you are most likely an employee. Keep that in mind as an overall theme that emerges from it. Like I said, these are not the only three factors that the court looks at but into a variety of factors to come to its conclusion. One thing that people have often asked me is: “Look I am actually incorporated and I’m providing services as a corporation so I’m definitely an independent contractor. Maybe not, and not necessarily. The fact that you are incorporated and you’re providing services as a corporation is one factor—it is not the deciding factor. The court may still find you an employee—even if you’re incorporated and you are providing services as a company.

Now we talked about CRA – usually a lot of people when they like to assign their position as an independent contractor – one of the purposes they want to take control of their taxes, they don’t want to pay C.P.P. / E.I. and they want to deduct certain expenses which are only available to businesses i.e., to independent contractors and not to employees. It is important to look at CRA’s view. I have provided a link here that you can check out. This provides CRA’s position on how do they determine what is the nature of the relationship, how do they apply the Test. The Test that they apply is not different from the Controlled Test but there are specific examples that CRA has quoted. By all means review that. If you absolutely want to be sure whether the nature of your relationship is going to be any kind of contractor or not you can actually seek an advance ruling from CRA. Basically, you send a document to CRA and say I am going to provide these – these – these services and am I considered an employee or an independent contractor. Based on that specific job description, CRA can give you an advance ruling whether you’re an employee or an independent contractor.

Hopefully this is helpful. We’ll continue to post more lectures because we notice that there’s a lot of interest by people in understanding this relationship and so probably in the next lecture we will try to talk about consequences of – the negative consequences of—if you are considered an employee as opposed to an independent contractor and what happens. So we’ll cover maybe that topic or other related topics. If you have any specific questions on these topics, please send us your comments, please ask us questions and we will be sure to add that in the next lecture. Thank you for watching.