Independent contractors

Engaging a contractor can seem like a simple alternative to hiring employees. However, great care must be taken in this area. The following are a few of the issues that regularly arise.

(i) Is it really an employment relationship?

Courts and administrative bodies will generally examine the entire relationship between the parties in order to determine whether an individual is a true contractor or in substance an employee. Although the existence of an independent contractor agreement will be taken into consideration, it will certainly not be determinative on its own. Other factors that will be taken into account include, but are not limited to the following: the contractor’s degree of control over his working arrangements, whether the company withholds employee statutory deductions on the contractor’s pay, whether the company monitors hours of work, whether the contractor is assuming his own risk of profit or loss, whether the contractor provides his own tools and workspace and whether the contractor is integrated into the workplace and enjoys benefits given to employees. Despite entering into so called “independent contractor” agreements, a company may face significant liabilities under various statutes and/or the common law for not meeting its obligations as an employer if it is determined that a contractor is in reality an employee.

Some of the risks following a determination that a contractor is in reality an employee are:

• Payment to the Canada Revenue Agency for outstanding Employment Insurance and Canada Pension Plan contributions, with or without a fine pursuant to the Income Tax Act (Canada);
• Fines pursuant to the Income Tax Act (Canada) for not withholding income tax at source;
• Payment to the Ontario Workplace Safety and Insurance Board of premiums, together with interest and/or fines levied against the company and/or directors, which can reach $100,000 and $25,000 respectively, pursuant to the Workplace Safety and Insurance Act (Ontario);
• Payment of “wages” owing such as overtime pay, vacation pay, statutory notice and statutory severance upon termination and/or fines levied against the company and/or directors, which can reach $500,000 and $50,000 respectively, per offence, pursuant to the ESA; and
• Pay in lieu of notice upon a contractor’s termination of employment, if he or she is found to be an employee under the common law.

(ii) Intellectual property rights

Unlike an employment situation, any intellectual property developed by the contractor will typically be owned by the contractor unless the agreement specifically provides that such intellectual property is to be owned by the company. Therefore, it is essential to have a written agreement with the contractor in which the contractor’s intellectual property rights are assigned to the corporation. Where the contractor is a corporation and/or will be using other personnel to perform the development services, proper diligence and/or contractual provisions should be utilized to ensure that any intellectual property rights that such personnel may possess in the work product or inventions developed as a result of the development services are properly assigned to the corporation (either directly or indirectly through the contractor).

Questions? Email us at startups@dentons.com.