Many employers underestimate the value of a having a written contract with their workers. One of the biggest challenges employers without a written contract can face is the status of a worker in the event of termination – is that worker an employee or independent contractor?
Unfortunately, when a working relationship is terminated, there are often feelings of animosity and resentment towards the employer on the part of the worker. At that point, any handshake deal made on good faith between the employer and the worker regarding the worker’s status is often long forgotten or disregarded.
The legal implications for the lack of written clarity about the relationship can be serious. For example, if an employer has been treating a worker like an independent contractor and on the termination of the working relationship, the worker claims it was actually a relationship of employment, one of the major implications is remittance of tax, Canadian Pension Plan contributions and Employment Insurance premiums to Canada Revenue Agency (CRA). An employer is statutorily obligated to make these deductions in an employment relationship. If the employer has been treating the worker as an independent contractor (who would be responsible for making his or her own remittances to CRA) and the worker has not been making those remittances, the employer will be responsible for the unpaid amounts if CRA determines that the relationship is one of employer/employee. Often, these payments will include significant interest and penalties. Further, there may be limited ability for the employer to recover this cost from the employee.
Another of the many challenges connected to this issue that an employer can face is that Employment Standards can pursue the employer for payments that should be made to an employee including vacation pay, overtime and leave.
It is vital to identify the status of the working relationship before it begins and to document it clearly with a written contract. Determining whether a worker is an independent contractor or an employee is not an exact science and simply specifying in a contract that the relationship is one of employer/employee or one of independent contractor is not necessarily enough to make it so. It is important to consult a legal professional to help determine the status of the worker and to help set this out clearly in a contract. That way, the employer runs less risk of mistaking the status of the worker and, if there is any conflict that arises down the road, there is written and accurate evidence as to the status of the working relationship.
If you need assistance drafting worker agreements for your workplace contact Megan Lorenz.
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