Misclassification of Employees July 18 2018

Purpose: The purpose of the HR Minute is to provide Humaniqa clients with timely information about human resources issues.  Please take a moment to read this important information.

It is important for employers to understand legislation in their jurisdiction regarding the proper way to classify independent contractors/employees. If an employer does not classify an independent contractor/employee correctly, there could be legal consequences. This is especially apparent following the implementation of Bill 148 in Ontario, where effective January 1, 2018 employers who misclassify employees as independent contractors could face penalties, including prosecution.

Independent Contractor vs Employee

There is no set definition for an independent contractor in Canada, however arbitrators as well as the Canada Revenue Agency rely on the four-point test as standard to determine which type of employment relationship exists. The method is based on four key points explained below: control, ownership of tools, the chance of profit/risk of loss, and integration.

  1. Control: A contractor decides when, where, and how their own work is performed.
  2. Ownership of tools: A contractor supplies their own tools.
  3. Chance of profit/risk of loss: A contractor has a chance of making a profit, run the risk of incurring loss due to bad debts or damage to equipment or materials, and covers operating costs.
  4. Integration: A contractor integrates the payer’s activities to their own commercial activities. 

Implications for Employers 

Misclassifying workers can lead to the failure to provide adequate coverage to employees who are improperly classified in terms of insurance, privacy, wage, and benefits which can result in significant penalties, interest, and legal fees. Below are some costs employers could incur:

  • Penalties of 10 to 20 per cent on unpaid Income Tax, EI, and CPP premiums plus interest;
  • Minimum wage, overtime, parental leave, vacation pay, etc.;
  • Potential claims for wrongful dismissal damages from early contract termination;
  • Workers’ compensation premiums plus fines and interest.

Penalties for misclassification are also legislated at the provincial level in some jurisdictions. For example in Ontario, if an employer is found guilty of misclassifying an employee they may face penalties of $350 for a first offence, $700 for the second, and $1500 for the third. These amounts are then multiplied by the number of misclassified employees. Employers may be fined an additional amount between $50,000 and $500,000 depending on the number of previous offences.  

In order to mitigate risk, employers should re-examine their relationships with contractors to make sure they are complying with employment standards legislation in their jurisdiction. If you are having trouble determining employment status in difficult or unique circumstances, we recommend you talk to a lawyer.