Most business principals assume they know the difference between an employee and an independent contractor and often hire one or the other to provide services required. It is critical to maintain boundaries in an arrangement involving an independent contractor, because reclassifications of the role are common and can be very costly to the principal.
There is also an intermediate classification; a lesser known entity called the dependent contractor1. If the principal’s business relationship is not clearly with an independent contractor, it will be deemed to be with a dependent contractor or with an employee, both of which attract significant obligations from the principal. These obligations are often imposed by the Employment Standards Tribunal, the Human Rights Tribunal, the Worker’s Compensation Board, the Canada Revenue Agency and the courts, and each of these entities has similar but not identical tests to discern the true nature of the relationship.
An employee provides work for the employer pursuant to an employment contract. The principal usually controls where, how, and when the employee provides services and the employee often (but not always) works exclusively for the employer. This relationship is governed by the employment contract, the common law, and by legislation which provides minimum standards for safety, hours, wages, holidays, vacation, leaves, and provision of notice. The employer retains the power to manage and alter these conditions as long as they comply with applicable law in British Columbia, including the Employment Standards Act [RSBC 1996] c.113, the Human Rights Code [RSBC 1996] c. 210, and the common law. Simply put, the employee is working for the principal, rather than working for themselves.
A dependent contractor provides services pursuant to a contract for services. The BC Employment Standards Act does not apply to dependent contractors but the Employment Standards Tribunal often determines whether an arrangement is actually an employment relationship. The BC Human Rights Code will also govern relationships if the agent is largely exclusive to one principal. If the relationship is marked by economic dependence and the contractor is sufficiently integrated into operations over time, independent contractors can silently transform into dependent contractors despite other hallmarks of an independent contractor arrangement. The dependent contractor appears to be working for themselves, but is economically reliant on the principal which can result in a severance award upon termination of their services.
An independent contractor also provides services pursuant to a contract for services. The parties have rights and responsibilities arising only out of the conditions of the contract, and are not subject to employment or human rights legislation or employment common law. The contract is essentially between two equal business entities that have freedom to contract and manage the relationship. Independent contractors are clearly in business for themselves.
Simply labelling the arrangement as one involving an independent contractor will not be determinative. Courts and tribunals look for common markers of dependence such as: exclusivity of the parties; level of control by the principal; whether the principal owns the tools required for the services; whether the principal is the only party risking loss and reaping profit; whether the contractor’s services are “part of the business”; the level of integration between the parties; and the permanency of the relationship.
The crux of the question is whether the party is providing the services on their own behalf or for the principal. Business principals should keep this distinction in mind at the time of hiring and throughout the business arrangement, regardless of what the arrangement was initially intended to be.
1 The brevity of this article prevents any discussion on the relationships subject to The Canada Labour Code RSC 1985, the BC Labour Relations Code [RSBC 1996] chapter 244, and the BC Worker’s Compensation Act [RSBC 1996] chapter 492. | ↩