Determining the Employer/Employee Relationship - IPG-069
Effective Date: April 3, 2006
Revised date: February 14, 2023
On this page
- Subject
- Background
- A contract of service versus a contract for service
- Importance of employee status
- Common Law tests in determining an employment relationship
- Making a determination for the purpose of the Canada Labour Code
- Gathering of the information
- Assessing the information and making a decision
- Conclusion
- References
Subject
The purpose of this Interpretations, Policies and Guidelines (IPG) is to ensure a uniform national application to determine the existence of an employer/employee relationship. When investigating the matter of employer/employee relationship, the total relationship that exists between the parties shall be examined utilizing the various criteria set by the courts.
In order for a worker to be protected by the provisions of Part II and Part III of the Canada Labour Code (Code) as an employee, there must be an employer/employee relationship.
An employer is in contravention of the Code if they knowingly misclassify an employee or have a history of misclassifying employees in order to avoid statutory obligations or deny employee rights.
In order to comply with the Code, employers must ensure that they take corrective measures to avoid misclassifying employees. They may be subject to enforcement action by the Labour Program, up to and including an administrative monetary penalty (AMP) or prosecution.
This IPG will assist in establishing the possible existence of an employer/employee relationship when conducting investigations under Part II and Part III of the Code.
Background
The employment relationship can be complex, with no quick and easy formulae to use which will provide an instant solution. When gathering information from the parties in regard to their work relationship, it must be kept in mind that the many "tests" are not tests in and of themselves. They are rather conditions outlined in jurisprudence. They may be given more or less weight in a particular case to determine if a worker is:
- simply part of the payer's business (contract of service), or
- in business on their own account (contract for service)
In Sagaz, the Supreme Court of Canada outlined some of the conditions to determine if a worker is an employee or an independent contractor. In the decision, the Supreme Court of Canada makes the following point that one must search for the total relationship of the parties:
"It is exceedingly doubtful whether the search for a formula in the nature of a single test for identifying a contract of service any longer serves a useful purpose…The most that can profitably be done is to examine all the possible factors which have been referred to in these cases as bearing on the nature of the relationship between the parties concerned. Clearly not all of these factors will be relevant in all cases, or have the same weight in all cases. Equally clearly no magic formula can be propounded for determining which factors should, in any given case, be treated as the determining ones."
A contract of service versus a contract for service
To sort out the question of whether a worker is an employee or independent contractor, what defines employment shall be examined.
The general principles of contract law govern the formation of the contract of employment. A contract of employment is a contract by which a person, the employee:
- undertakes for a limited or indeterminate period of time
- to do work for remuneration
- according to the instructions; and
- under the direction or control of another person, the employer.
Within the framework of a contract of employment, a person:
- carries out the service of work
- receives remuneration, and
- carries out work according to the direction and control of the employer
The terms of the contract may be either in writing or given orally, but both are equally binding and enforceable. When a person is hired to be an employee, the person enters into a contract of service, which is an employer/employee relationship.
Another type of contract between 2 parties is that of an independent contractor or a contract for service. This type of contract may be defined as a contract by which a person, contractor or service provider makes a commitment to another person, the client, to:
- carry out material or intellectual work or
- provide a service for a price or fee
The characteristics of a contract for service are that:
- the contractor is free to choose the means of performing the contract, and
- no relationship of subordination exists between the contractor or the provider of services and the client in respect of such performance
To determine the existence of an employment relationship, the nature of the contract that binds both parties shall be reviewed.
Importance of employee status
Over the past 2 decades there is an emergence of "own-account" self-employment such as:
- freelancers
- consultants, and
- independent contractors
These have become more prevalent in the workplaces due to a range of factors such as:
- the globalization of trade
- the introduction of new technologies
- the volatility of international and domestic markets, and
- workers' desire for autonomy and independence
For these economic and social reasons, the boundary between independent contractor and paid employment is blurring.
There is a need to differentiate whether a worker is categorized as an employee or as an independent contractor. Federal jurisdiction employees receive numerous protections under labour standards and health and safety legislation. Independent contractors are not employees and thus, do not enjoy the protection of these statutes. The nature of the relationship shall be reviewed to determine if an employer/employee relationship exists in order for Part II and Part III of the Code to apply to the person as an employee.
All statutes have specific policy goals. As a result, it is possible that a worker may be found to be an "employee" for the purpose of one law, but not another. The Supreme Court of Canada has clarified that courts and tribunals must take into account the particular policy objectives of the statute when deciding if a person has employee statusFootnote 1. The Labour Program's investigative process must therefore reflect the policy goals of the Code. The policy objectives of the Code are to ensure minimum employment standards. They are also to prevent accidents and injuries to health arising out of the course of employment within Federal Jurisdiction.
Common Law tests in determining an employment relationship
The definition of "employee" and "employer" contained in the specific statutes is not usually helpful in determining whether there is an employment relationship between 2 parties. When disputes arise, courts and tribunals have resorted to the common law and civil law tests to determine employee status and whether a person is an employee under a certain statute.
To make a determination on the issue of employer/employee relationship, the cases referenced in this document shall be read and analyzed in order to:
- understand the legal principles
- observe how the judge or arbitrator identifies the salient points of each case; and
- scrutinize how each factor of the working relationship between a payer and a worker was weighed
The following "tests" suggest evidence that shall be weighed, at times differently, depending on the situation. It will help to determine whether a worker is:
- part of the payer's business, or
- in business on their own account
Refer to the References below for a listing of all the cases cited.
Control test
This was the first attempt to clarify the relationship between a worker and a payer. It was set out in Regina v. Walker (1858). The Control Test was simply assessing the presence or absence of control a manager or supervisor might or might not have over their worker:
…A principal has the right to direct what the agent has to do; but a master has not only that right, but also the right to say how it is to be done.
This test was seen as too simplistic especially in recent years, when highly skilled and professional workers possess skills beyond the ability of their employers to direct.
Fourfold test
This was developed in a 1947 Privy Council decision in Montreal v. Montreal Locomotive Works Ltd. et al where the court stated:
… It has been suggested that a fourfold test would in some cases be more appropriate, a complex involving:
- control
- ownership of the tools
- chance of profit
- risk of loss
Control in itself is not always conclusive.
Lord Wright went on to indicate the crucial question is "whose business is it?" This question is from the worker's perspective and not the payer's.
Integration test
This was first developed in Stevenson Jordon and Harrison, Ltd. v. MacDonald and Evans, (1952). This approach attempts to find if the service being provided by the worker is:
- performed as an integral part of the business, or
- done on behalf of the business but not integrated into that business
This "test" is best explained by an excerpt from the decision:
… One feature which seems to run through the instances is that, under a contract of service, a man [sic] is employed as part of the business, and his [sic] work is done as an integral part of the business; whereas, under a contract for services, his [sic] work, although done for the business, is not integrated into it but is only accessory to it.
Making a determination for the purpose of the Canada Labour Code
To help examine the issue of who is an employee or an independent contractor, it may be useful to envision a continuum. On one extreme end of the continuum is a worker who is clearly an employee. For example, a person would be classified as an employee if they were:
- hired to be a mechanic
- paid by the hour and
- closely supervised by a foreman
On the other end of this continuum is a worker who will obviously be an independent contractor. This would be a worker who has their own company and performs work for a variety of companies. This worker:
- is contracted for the specific task of upgrading a company's computer software
- is paid a specified amount for the job
- signs a contract for a specific time period, and
- is not supervised, but reports their progress to the department manager
The section “Differentiating an employee and an independent contractor” identifies key factors that distinguish an employee from an independent contractor.
However, attempting to classify the workers in the middle of this continuum is less straightforward. This is because the workers that fall in the middle of this continuum have characteristics of both an employee and an independent contractor. They are therefore not so readily classified.
Gathering of the information
In order to make a decision if a worker is an employee or independent contractor, detailed information on how the relationship is structured must be gathered and assessed. To gather the facts, an Employer/Employee Relationship Questionnaire will be used as a tool for gathering information on the relationship between the payer and worker.
Once sufficient information on the relationship has been gathered, these facts shall be organized, assessed and weighed to determine whether there is either an employment or independent contractor relationship.
Assessing the information and making a decision
When analyzing the facts gathered on the relationship between the payer and the worker, the format established by the Supreme Court of Canada shall be followed. (“Assessing the employment relationship” below is useful).
The Court first states that the level of control will always be a factor, but 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 [sic] own account.
All aspects of the relationship shall be examined and the following factors taken into account. Bear in mind this is not an exhaustive list and there is no set formula as to the application. The relative weight of each will depend on the particular facts and circumstances of the case. The factors include:
- whether the worker provides their own equipment
- whether the worker can hire their own helpers
- whether the worker can contract out work to other contractors
- whether the worker can provide services to more than one payer
- whether the worker is part of the employer's organization
- whether the worker has to report to the work site each day
- the financial investment made by the worker
- the extent to which the worker manages that investment
- whether the worker is exposed to personal financial risk in carrying out the work
- the worker's opportunity for profit, or risk of loss
- is the person liable for damage or quality of the work
- the reporting relationship:
- whether the worker has to report if he will be absent from work
- whether the worker is required to submit reports each day, week
- terms of payment, production obligations
- the manner in which the worker is hired or terminated
Differentiating an employee and an independent contractor
The following lists outline the points that differentiate an employee and an independent contractor. They are not an exhaustive list of factors that could be considered in making a determination.
A worker can be classified as an employee if the following characteristics are present:
- worker works exclusively for the payer
- payer provides tools
- payer controls duties, whether that control is used or not
- payer sets working hours
- worker must perform services
- payer provides pension, group benefits
- worker is paid vacation pay
- payer pays expenses
- worker paid salary or hourly wage
- worker reports to payer's workplace on regular basis
A worker can be classified as an independent contractor if the following characteristics are present:
- worker may work for other payers
- worker provides tools
- worker decides how the task is completed
- worker sets own working hours
- worker may hire someone to complete the job
- worker does not participate in payers benefit plans
- worker receives no vacation pay and no restrictions on hours of work, or time off
- worker pays own expenses
- worker is paid by the job on predetermined basis
- worker submits an invoice to payer for payment
- worker may accept or reject work
If the worker falls within the middle of this continuum the classification of employee or independent contractor becomes complicated.
Assessing the employment relationship
The task is now to organize and assess the information gathered. This process will move the worker into one side of the continuum. It will also confirm if there is an employment relationship, or if the worker is in business on their own account.
The first stage is to organize the results of the Questionnaires, and any other material that has been gathered. Analyze the answer to each question from both the Payer and the Worker. Then decide if the evidence moves the worker to the Employee or Independent Contractor side of the Continuum.
These factors (not an exhaustive list) can include:
- total relationship
- control
- tools
- change of profit
- risk of loss
- integration
Application of the facts
To move the worker to one side of the continuum, it is necessary to examine the total relationship and answer the central question as posed by the Supreme Court of Canada:
whether the person who has been engaged to perform the services is performing them as a person in business on his [sic] own account.
In making the determination if a worker is classified as a person in business on their own account, remember, the Supreme Court of Canada states that:
the level of control the payer has over the worker's activities will be a factor, but other factors to consider include 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 the performance of their tasks.
It bears repeating that the above factors constitute a non-exhaustive list, and there is no set formula as to their application. The relative weight of each depends on the particular facts and circumstances of the case.
When examining the information, remember that an answer to the question of "whose business is it?" cannot be completed by taking a sum total in one or more categories. This will not move a worker into one category or another. It is the total relationship that is being examined.
Listed below is a brief explanation of the terms. They have been used to discern if a working relationship is that of an employee or an independent contractor:
Control
The Supreme Court of Canada indicates that in making the determination of whether a person is in business on their own account, the level of control an employer has over the worker's activities will always be a factor. An employment relationship implies some supervision or control over the worker. The right to exercise control is significant, whether or not the control is actually exercised.
Ownership of tools
If a worker provides their own tools, this may be indicative of an independent contractor. Also important is the amount of money invested by the worker in these tools.
Chance of profit and risk of loss
If the worker has a financial investment in a business, this is considered a strong indicator of an independent contractor. If there is no risk of loss this usually is determinative of an employment relationship. If a worker may possibly lose financially from the relationship, they will generally be considered to be an independent contractor.
Integration
It is important to remember that this point must be examined from the worker's perspective, not the payer. A contract of service (employee) is where the work is done as an integral part of the business of the payer. This is opposed to a contract for services (independent contractor), where the work done, although being done for the business, is only an accessory to the core or central function of the payer. Does the worker behave in a "businesslike" manner as someone in business for themselves?
Weighing the facts
This is the most important part of analyzing the information. When reviewing the factors, there may be some facts that support an employment relationship and other facts indicative of an independent contractor.
In order to resolve this issue, the investigation must discover the true essence of the working relationship of the parties. Review the evidence falling in the categories of:
- control
- ownership of tools
- chance for profit
- risk of loss, and
- integration
As the facts emerge, you should be able to decide what weight to assign each category based on a thorough review of all the evidence. In other words, control may favour an employee relationship. However, ownership of tools may be assigned more weight due to how the total relationship is structured. Therefore, because of the increased weight given to this factor, the worker is moved into the independent contractor side of the continuum.
Determination
The determination of whether a worker is an employee or an independent contractor is "one of fact", in each particular case. Each case is unique and requires a thorough review of the facts. It is also important to remember that when attempting to move a worker to one side of the continuum or the other, you must examine the total working relationship. There is no one factor that is determinative, and there is a non-exhaustive list of factors to consider.
Conclusion
In order for a person to gain the protection afforded to employees under Part II and Part III of the Code, a worker must have status as an employee. Each case is specific. Therefore, all the relevant facts must be examined with care before decision is made if a worker is an employee or an independent contractor.
Once a decision has been made as to the status of the worker, the parties shall be informed of the decision in writing.
References
- 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R. 983
- Dynamex Canada Inc. v. Mamona, [2000] C.L.A.D. No. 477
- Dynamex Canada Inc. v. Mamona, [2002] F.C.T. No. 393
- Dynamex Canada Inc. v. Mamona, [2003] F.C.A. No. 248
- Hyman Aizenberg v. D.H.L. International Express Ltd. YM2707-4996 (Arbitration court - QC)
- Montreal v. Montreal Locomotive Works Ltd. et al, [1947] 1 D.L.R. 161
- Quebec Asbestos Corp. v. Couture , [1929] S.C.R. 166
- Shaw Communications Inc. v. M.N.R., [2002] T.C.J. No. 314
- Stevenson Jordan and Harrison, Ltd. v. MacDonald and Evans, [1952] 1 T.L.R. 101
- Technical Service Solutions Inc. (TSS) v. M.N.R., [2002] T.C.J. No. 101
- Velocity Express Canada Ltd. v. M.N.R., [2002] T.C.J. No. 136
- Wiebe Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553
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