The Employee vs Independent Contractor Legal Test in Canada

Navigating the complex landscape of employment relationships is a task that many small businesses and workers grapple with. One of the most pressing questions is: Is the individual an employee or an independent contractor? While many might think that a signed agreement answers this question, the reality is far more nuanced.

Canadian courts have developed a legal test that delves into the actual substance of the working relationship, going beyond mere labels and paperwork. This blog post aims to shed light on this legal test, breaking down its key components.

Use our calculator to see if a worker is an employee or an independent contractor here.

The Legal Test: Employee or Contractor

Whether an individual is an employee or an independent contractor is a factual question that looks at the true substance of the relationship.

Any agreement (i.e. an independent contractor agreement) that purports to describe the nature of the relationship is not determinative. Moreover, the absence of statutory deductions or issued T4 slips is also not determinative.

Although there is no universal test to determine whether a person is an employee or an independent contractor, the following is the most cited legal test adopted by the courts in Canada: According to the Supreme Court of Canada, in Sagaz Industries Canada Inc. et al. v. 671122 Ontario Limited, [2001] 2 SCR 983, 2001 SCC 59, "The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account."  

In making this determination, the level of control the employer has over the worker's activities will always be the most important factor. However, other non-exhaustive factors to consider include the following:

• Whether the worker provides their own equipment, 
• Whether the worker hires their own helpers, 
• The degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and
• The worker's opportunity for profit in performing their tasks.
  

The Ontario Court of Appeal has endorsed the above legal test for determining whether a worker is an employee or a contractor. In Belton v. Liberty Insurance Co. of Canada, 2004 CanLII 6668 (ON CA), Juriansz J.A. commented that the following principles distinguish contractors from employees:

1. Whether or not the agent was limited exclusively to the service of the principal;

2. Whether or not the agent is subject to the control of the principal, not only as to the product sold but also as to when, where and how it is sold;

3. Whether or not the agent has an investment or interest in what are characterized as the "tools" relating to his service;

4. Whether or not the agent has undertaken any risk in the business sense or has any expectation of profit associated with the delivery of his service as distinct from a fixed commission;

5. Whether or not the individual's activity is part of the business organization of the principal for which he works. In other words, whose business is it?   [Emphasis added.]

Analyzing each ab0ve-noted factor, in conjunction with one another, answers whether an individual is an employee or an independent contractor. 

Conclusion: Legal Test For Contractors vs. Employees

Understanding the legal test for determining whether someone is an employee or an independent contractor is not just a matter of academic interest; it has real-world implications for both businesses and workers. From tax obligations to employment rights, misclassification carries significant consequences. The Ontario Court of Appeal's endorsement of the legal test provides a structured way to assess the nature of a work relationship. By examining factors such as "control", among others, you can gain a clearer picture of the true employment status of a party to a working relationship. So the next time you find yourself pondering this complex question, remember that the answer lies in the substance of the relationship, not just the form it takes on paper.

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