Employee Or Independent Contractor?

22 April 2013
Article by Earl Phillips 

How can you be sure the independent contractor you have retained will not be considered an employee?  In a post last year we outlined the importance of the distinction, the consequences if you get it wrong, and the four tests that are typically applied.  We concluded the four tests boiled down to this question:  Is the person in business for himself?

A recent decision of the Federal Court of Appeal, 1392644 Ontario Inc. O/A Connor Homes v. The Minister of National Revenue, confirms that the central question is:

whether the person is performing the services as his own business, on his own account.

But in doing so, the court specifically calls for a two-step  inquiry:  First – what is the subjective intention of the parties?  Second – does the objective reality of the relationship match the subjective intent?

In our experience, there are not many cases where the parties have not put their minds to what they want to accomplish, and almost always they specifically state an intention to form an independent contractor relationship.  Nevertheless, the court determined that the question of intention must be addressed, and it must be addressed as the first step.  So if the parties have not specifically stated their intentions, the court can look at their behaviour, such as the form of invoices that are being rendered, registering for GST, and filing income tax returns as an independent contractor.

But even if the parties have clearly expressed their intention, or behaved as if they had an independent contractor relationship, the second step can override all those good intentions.  As the court said:

… the subjective intentions of the parties cannot trump the reality of the relationship as ascertained through objective facts.

And so the second step involves going back to look at all the tests we reviewed in our earlier post: control, provision of tools, risk and opportunity for profit and integration.

Despite your best intentions, and despite getting past the first of this new two-step inquiry, you still have to show that the person is in business for himself.

Having a properly drafted agreement is important, but how the relationship works in fact is even more important.

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