Michael Murphy
Michael Murphy, Lawyer, McInnes Cooper
 

Whether someone is an employee or an independent contractor has long caused employers a degree of angst. And the recent emergence of a new “sharing economy” is forcing the law to respond – ratcheting up the old angst over this characterization to “uber” levels. Here’s how independent contractors and employees are traditionally distinguished, how the new sharing economy is changing things, and five tips to help employers soothe the angst by minimizing the likelihood a court will characterize a relationship as employer-employee rather than contractor-independent contractor.

THE OLD ANGST 

Characterization as an employee or independent contractor has always been important. But the test has never been a “bright line” one, entailing uncertainty – and angst – in its application. The traditional legal test for employment weighs four key factors: the principal’s degree of control over the person; ownership of the tools; chance of profit/risk of loss; and integration. The more the principal exerts, owns or bears, the more likely it’s employment. Yet the characterization is important because it carries certain consequences:

Employees. Employees in Canada (and the US) get certain benefits and protections not afforded to independent contractors, like: employment standards legislation rights (e.g. paid vacation, overtime, and minimum termination notice); the right to collect Employment Insurance; certain additional rights under human rights legislation; and rights, including to reasonable notice, on termination.

Employers. Employers have corresponding obligations and liabilities to employees, like source withholdings, paying into CPP and EI, and the risk of vicarious liability. So hiring independent contractors usually means less administrative work.

Contractors. Contractors often choose the relationship for its flexibility, control, and favourable tax treatment.

THE UBER ANGST

As the economy changes, so too must the law – and the test for employment – ratcheting up the employer’s old angst over this characterization to “uber” levels. A key economic change is the emergence of a new “sharing” or “gig” economy. As more companies migrate to this new service delivery model, the legal definition of an employee must respond, affecting all companies relying on “independent contractors”. Take Uber for example. Started in 2009, Uber is a web application linking drivers with customers and essentially replacing traditional taxi services. It’s been estimated Uber has about 300,000 drivers in the US who “sign up” online; customers “find” drivers using the Uber app. Uber drivers use their own cars, have the “freedom and flexibility to driver whenever [they] have time”, and don’t answer to a supervisor. Success as an Uber driver depends on how well-rated she is by customers who use her services. The company’s take on drivers’ status is obvious from its website:

Drive with Uber and earn great money as an independent contractor. Get paid weekly just for helping our community of riders get rides around town. Be your own boss and get paid in fares for driving on your own schedule.

Yet a number of class action lawsuits against Uber have been filed in the US contending that Uber drivers are employees – not independent contractors. Uber has argued that it lacks fundamental control over drivers, and it merely provides access to software that allows drivers and customers to connect for a fee. And though US court decisions don’t directly impact worker rights in Canada, Uber is just one example of the “sharing economy”; others include Lyft, TaskRabbit, Instacart, Shyp and AirBnB.

The law is changing to reflect this new economy. It’s still in progress, but it’s now easier than ever to characterize someone as an employee instead of independent contractor.

Test. The traditional indicia of employment remain relevant, but the Supreme Court of Canada recently indicated the test is fundamentally about control and dependency, requiring an examination of “how two synergetic aspects function in an employment relationship: control exercised by an employer over working conditions and remuneration, and corresponding dependency on the part of a worker.” (see, for example, McCormick v. Fasken Martineau DuMoulin LLP).

Decisions. The NS Court of Appeal approved a NS Labour Board decision finding an employment relationship even where the workers weren’t strictly controlled by, or dependent on, the employer. The Board specifically stated that in the “new economy,” it has a mandate under the Trade Union Act to extend collective bargaining rights to “non-self-dependent employees”, significantly modifying the usual rules and procedures for trade union certification applicable to such workers (see Egg Films Inc. v. Nova Scotia (Labour Board), leave to appeal to the SCC denied). Though in the narrow context of a certification application under that Act, the Court’s decision certainly suggests that even very tenuous relationships in NS may be characterized as employment.

5 TIPS TO SOOTHE THE ANGST

Employers must take care not to tip the balance in favour of “employee” in borderline cases. Here are five tips to help employers soothe the uber angst by minimizing the likelihood a court will characterize a relationship as employer-employee rather than contractor-independent contractor.

  1. Do use written contracts. The parties’ stated relationship isn’t determinative, but it can help. A written contract also details other relevant terms and conditions of the relationship, and is good practice in any event for both independent contractors and employment relationships.
  2. Do loosen the reins. Allow contractors to develop their own schedules and require them to use their own tools (e.g. laptops, phones, etc.), where appropriate.
  3. Do stay independent. Don’t rely on a contractor so much that she grows dependent on your business, or prohibit her from working for others while working for you.
  4. Do back off. Don’t treat contractors like employees, for example by inviting them to participate in staff events (like Christmas parties), applying employee policies to them, offering them employee bonuses or disciplining them.
  5. Do tell it like it is. When someone looks and acts like an employee, the employer might be best just calling her an employee – or risk paying down the road for failure to withhold income tax, for unpaid wages, for employment standards legislation violations, and so on.

About the author:

Michael Murphy is a labour and employment lawyer. He advises and represents employers on a wide range variety of employment and pension-related issues, including employment contract drafting and advice. You can reach Mike at michael.murphy@mcinnescooper.com.