{"id":23809,"date":"2016-11-11T10:49:54","date_gmt":"2016-11-11T15:49:54","guid":{"rendered":"https:\/\/www.cccc.org\/news_blogs\/?p=23809"},"modified":"2016-12-21T16:47:33","modified_gmt":"2016-12-21T21:47:33","slug":"tax-court-of-canada-considers-employee-contractor-distinction","status":"publish","type":"post","link":"https:\/\/cccc.org\/news_blogs\/legal\/2016\/11\/11\/tax-court-of-canada-considers-employee-contractor-distinction\/","title":{"rendered":"Employee vs Contractor: Do You Classify Correctly?"},"content":{"rendered":"

Authored by Philip A.S. Milley, Associate Director of Legal Affairs<\/em><\/p>\n

A common\u00a0issue faced by charities is how to properly classify individuals as either employees or independent contractors. Courts refer to the distinction as contracts “of service” (employee) versus contracts “for services” (independent contractor). Whatever you call it, the determination of whether an individual is an employee or an independent contractor is important to get correct. Whether one is an employee or an independent contractor is fact specific and the determination must be completed\u00a0on a case by case basis. It is advisable to seek legal advice when making this determination.<\/p>\n

Why is the distinction important?<\/h6>\n

Employees and independent contractors are treated differently with respect to various rights and obligations. Employees enjoy\u00a0some rights on termination. They also enjoy certain entitlements under employment standards legislation such as overtime pay, minimum wage, and paid vacation which are generally not enjoyed by\u00a0independent contractors. Furthermore, employers are generally obligated to make various\u00a0source deductions and remit payments respecting income tax and workers’ compensation amounts.<\/p>\n

What’s the Problem?<\/h6>\n

Organizations are attracted to the cost savings and increased flexibility contractors offer. Organizations commonly intend to create a\u00a0independent contractor relationship to avoid the costs and liabilities that are seen to come with an employment relationship. Problems arise when the relationship suggests an employee employer and not an independent contractor relationship.<\/p>\n

Often, individuals who become independent contractors do not fully understand the consequences of doing so. Individuals are rarely informed and seldom understand the consequences and obligations of not being classified as an employee. Being classified as an independent contractors means that an individual can be responsible for, among other things, EI, CPP, Worker’s Compensation, insurance, and other potential liabilities.<\/p>\n

Getting the classification wrong can result in the\u00a0organization paying\u00a0past source deductions, remittances, penalties or wrongful dismissal damages. This is exactly what happened in the recent Tax Court of Canada case Sistema Toronto Academy Inc. v MNR<\/a>\u00a0<\/em>that\u00a0reinforces the principle that charities should not merely rely upon their subject intention to create an independent contractor relationship, but ensure that their conduct demonstrates that an independent contractor relationship is created.<\/strong><\/em><\/p>\n

The Issue<\/h6>\n

In this case, the Minister of National Revenue ruled that Sistema was responsible for various payments as the result of the determination that its instructors were engaged in “insurable and pensionable employment”, within the meaning of paragraph 5(1)(a<\/i>) of the Employment Insurance Act<\/i> and paragraph 6 (1)(a<\/i>) of the Canada Pension Plan<\/i>.\u00a0The issue the court considered was whether the instructors were engaged under a contract of service (as employees) or a contract for services (as independent contractors) during the periods covered by the rulings.<\/p>\n

Material Facts of the Case<\/h6>\n

Sistema Toronto Academy Inc. (“Sistema”), a registered charity,\u00a0provided free after-school music instruction to disadvantaged youth in elementary schools in Toronto. \u00a0Sistema engaged professional musicians to provide musical instruction on behalf of the charity. In 2011, instructors were hired as employees, which was clear from the employment agreement. In\u00a0September 2012, Sistema\u00a0decided that newly hired instructors would work as independent contractors. The only material difference in how the two groups of instructors were treated was\u00a0respect to source deductions. Instructors engaged in September 2012 or later did not have source deductions taken from their pay, while those hired prior\u00a0did.<\/p>\n

In 2014 the engagement letter for instructors was modified to clarify that the instructor were independent contractors, which was signed by several of the instructors. The revised engagement letter\u00a0modified the following\u00a0terms of the agreement:<\/p>\n