Hiring an independent contractor is a great way for a business to save on costs and increase its flexibility. However, because independent contractors and employees are legally distinct kinds of workers, misclassification is a common and costly mistake. It’s important that employers in Alberta understand the difference between employees and independent contractors to avoid legal, financial, and reputational risks.
At Verhaeghe Law, our employment and labour lawyers have experience representing both employers and employees. Whether you are an independent contractor exploring your legal options or you are a business struggling with misclassification, we can help. To discuss your legal situation, schedule a consultation with our legal team today.
Independent Contractors vs. Employees: What’s the Difference?
The definition of an independent contractor is different than that of an employee. It is important to recognize this distinction, as each type of worker has varying legal rights and entitlements under Alberta’s Employment Standards Code.
- Independent Contractors: Independent contractors are defined as self-employed. They set their own schedule and hours, use their own tools, and may work with multiple clients at a time. Independent contractors are not afforded any benefits under the Employment Standards Code.
- Employees: Employees work underneath their employer’s control, receive regular pay from a single employer, and are entitled to certain protections and benefits.
There are a range of differences between contractors and employees, including tax responsibilities, exclusivity clauses, employment benefits, and independent financial risks. For example, independent contractors must pay for their own tools and transportation while employees do not.
When disputes arise over contracts, the status of a worker can play an important role in the outcome of a case. However, a contract alone will not determine the status of a worker (and therefore, the rights they are afforded). Courts will examine the total relationship between a worker and an employer by employing a worker status test. This includes an assessment of:
- Control over work
- Ownership of tools and equipment
- Financial risk
- Degree of integration into the business
- Duration and exclusivity of the relationship
- And more
The Legal Risks of Misclassifying An Independent Contractor in Alberta
Misclassification of an independent contractor occurs when a worker is incorrectly labelled as a contractor when they should be classified as an employee. If a business misclassifies an independent contractor, there can be serious legal and financial risks associated. This is because the misclassification may result in a worker not receiving their legal rights, benefits, and protections under employment standards legislation. For example:
- Employment Standards Violations: If you misclassify an employee as an independent contractor, you may owe them back pay, unpaid vacation, overtime, interest, and other penalties. In Alberta, severance pay for a misclassified independent contractor can be as much as 24 months’ pay.
- Tax Consequences: Because independent contractors file their own taxes, and employers are responsible for deducting taxes from their employees’ paychecks, there can be tax consequences for misclassification. Improper tax remittances may result in CRA audits, fines, or even criminal liability.
- Workers’ Compensation Claims: If an independent contractor is injured on the job, but is later reclassified as an employee, an employer may be liable for their injuries. An employer may need to provide insurance coverage or other benefits should a workers’ compensation claim be filed.
- Wrongful Dismissal Risks: If a misclassified worker is fired wrongfully, they may be able to claim severance or notice under Alberta law. It’s important to note that even if a worker signs an “independent contractor” agreement, a court can still reclassify them as an employee depending on working conditions and the worker status test.
Although contracts are a strong tool to protect your business, you should not rely on them alone to avoid misclassification risks. With the help of an experienced employment lawyer, you can draft clear service agreements while ensuring that your working relationship reflects your contract terms.
Concerns About Misclassification in Alberta? Contact Verhaeghe Law Today
Classifying your workers properly is more than just a paperwork issue–it’s a legal liability. If you are hiring independent contractors, dependent contractors, or employees, it’s important that you consult with a lawyer to review your contracts first.
Verhaeghe Law’s employment lawyers can help Alberta businesses ensure they’re hiring correctly and avoiding expensive mistakes. Contact our office in Edmonton today to schedule a consultation.