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	Employee or Independent Contractor: What is the Test?
	by Bernard C. LeBlanc
	August 2004 - Vol 5 No 11

	Professionals often consider themselves to be “independent contractors”, as opposed to “employees”. Two of the more common reasons for characterizing themselves this way is because they provide services to a range of different clients or organizations. There is also an obvious tax advantage to being an independent practitioner as opposed to an employee. Typically, “employees” are entitled to notice of the termination of their employment, or pay in lieu of notice, whereas independent employees usually are not, unless their agreements specifically provide for notice. On the other hand, independent contractors are entitled to deduct their business expenses for tax purposes. There are also a number of other differences, but these are two of the most significant ones. The Ontario Court of Appeal recently reaffirmed the test to determine when professionals are employees, and when they are independent contractors. In Belton v. Liberty Insurance Liberty Co. of Canada, [2004] O.J. No. 3358, the suggestion was that commissioned sales representatives were independent contractors and therefore not entitled to notice when they were constructively dismissed. The court pointed out that there is basically a five-part test to determine whether someone is an employee or an independent contractor: 1. Does the person work exclusively for one person or organization? 2. Is the person subject to the control of the principal, not only as to the services provided or products sold, but also as to when, where and how those services are provided or the products are sold. 3. Whether or not the person has an investment or interest in what are characterized as the “tools” relating to their service. In other words, does the person use their own equipment or is the equipment owned by their principal? 4. Has the practitioner undertaken risks in a business sense? Alternatively, is there an expectation of profit associated with the delivery of the service as distinct from a fixed commission? The riskier the proposition, the more likely it is that the person would be seen to be an independent contractor. 5. Whether or not the activity is part of the business organization of the principal. In other words, whose business is it? As the name implies, the more “independent” the person is, the more likely it is that a court, and likely the taxation authorities, would consider the person to be an independent contractor. It is interesting to note that the agreement in Belton specifically identified the sales representatives as independent contractors. However, the Court of Appeal found that because the representatives basically worked only for the defendant, characterizing the relationship in the agreement is not conclusive. Ultimately, the court found that the representatives were in fact employees of the defendant and therefore entitled to reasonable notice following their constructive dismissal. This case demonstrates that when these issues are determined, courts look to the substance of the relationship, not to the formalities such as what the agreement itself says about the nature of the relationship. Organizations that employ practitioners who are viewed as “independent contractors” would therefore be wise not only to ensure that they consider the test set out by the court, they should also ensure that the practitioner executes an agreement that contains a provision that indemnifies the “employer” in the event that taxation authorities deem the practitioner to be an employee as opposed to an independent contactor. Practitioners, on the other hand, would wish to avoid signing such an agreement, and try to maintain as much independence from their principal as possible. It is also useful in virtually all circumstances to obtain legal advice before signing any agreement. [Professional Practice and Liability on the Net is a monthly Internet newsletter addressing issue of interest to a wide range of professionals. Please consult with a lawyer for specific legal advice. If you wish to be removed from the list of subscribers, please simply reply to this email. If you wish to reprint this article, please provide appropriate credit, and send a copy of the publication to, Steinecke Maciura LeBlanc, 393 University Avenue, Suite 2000, Toronto M5G 1E6. Or, call 599-2200, ext. 232, or email: bleblanc@sml-law.com. Visit our website at http://www.sml-law.com. Comments and suggestions are also welcome. ]



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	Professional Practice and Liability on the Net is a monthly internet newsletter addressing issues of interest to a wide range of professionals. Please consult with a lawyer for specific legal advice. If you wish to be removed from the list of subscribers, please simply reply to this email. If you wish to reprint this article, please provide appropriate credit, and send a copy of the publication to, Steinecke Maciura LeBlanc, 401 Bay Street, Suite 2308, P.O. Box 23, Toronto, ON M5H 2Y4. Or, call 599-2200, ext. 232, or email bleblanc@sml-law.com. Comments and suggestions are also welcome.