Is Your Contractor Actually a Contractor?

Canadian law changes frequently. To the extent there are changes in the law, the information in this blog post may no longer be accurate. This blog post does not create a lawyer-client relationship. Content provided herein is for informational purposes only and should not be relied upon as legal advice.

There is a trend among companies to engage contractors instead of employees. In many cases this can be a prudent business strategy. Contractors can be easier to dismiss if they are underperforming, administration can be simpler, and engagement of contractors can be more cost effective (for example, no need to pay overtime or vacation pay). But, the key word here is can. As many businesses learn after being on the wrong end of a demand letter or, worse yet, a law suit, engaging contractors may not be so prudent after all.

The benefits of engaging a contractor are real, but they arise only if the payer-contractor relationship is established properly in the first place and only if the relationship is properly maintained from beginning to end. If your business lacks properly drafted contracts with its contractors or if the contractor arrangement isn’t carefully maintained, your business could face significant liability in a multitude of ways. In a worst case (but very real) scenario, the improper use of a contractor could permanently incapacitate your business. The good news? Sound legal guidance can help your business avoid these problems.

Source of Liability #1: Misclassification

In this blog post, I will discuss just two of many sources of liability connected to the engagement of contractors. The title of this blog post speaks to the first source of liability: misclassification of workers. The worker may call herself or himself a contractor, you and your contractor may intend that the relationship be an payer-contractor relationship, your contract may be titled “Independent Contractor Agreement,” and the contract may even explicitly state that the worker is a contractor, but is your contractor actually a contractor? One would think that these factors would be enough to confirm that a worker is a contractor rather than an employee, but in actuality, these factors standing alone, or even combined together, are most likely insufficient to establish a contractor relationship.

Instead, whether a worker is a contractor is determined after assessing a number of factors, including whether the worker owns its own equipment, sets its own hours, and has a chance to profit. Typically, such a determination occurs as a result of a complaint made to the employment standards branch, Canada Revenue Agency, or a judgment of a court.

So What’s The Risk?

Companies, and their directors, can face significant liability and penalties if they improperly engage workers as contractors when they are actually employees. If an employee is misclassified as a contractor, your company (and its directors) may be liable for:

• Years of vacation pay calculated at 4% or 6% of all past wages;
• Months worth of vacation days;
• Untold hours of overtime pay;
• Months of severance pay (also known as damages in lieu of reasonable notice) if the worker was wrongfully dismissed;
• All costs connected to the worker’s injury, if they get injured while working for your business;
• Payment of previously owed worker’s compensation contributions;
• Penalties for non-compliance with employment standards legislation;
• Penalties for non-compliance with workers’ compensation legislation;
• Past Canada Pension Plan (CPP) contributions for that misclassified worker;
• Past Employment Insurance (EI) contributions for that misclassified worker;
• Income tax remittances for the misclassified worker;
• 10% penalty on monies not remitted or deducted;
• Interest on owed CPP and EI;
• Fines of up to $25,000; and
• In some cases, directors of companies may even face imprisonment as a consequence of their misclassification of a worker.

Suffice it to say, misclassification of a contractor can have serious and wide ranging consequences for all involved.

Source of Liability #2: Intellectual Property Rights Infringement

You’re probably thinking at this point, how could it get any worse than misclassification of a worker? Bad news, it can.

Imagine this. You’ve got a great business idea, funding in place, and now you need a programmer to develop some key software to bring your idea to life. You find a great programmer and hire him or her as a contractor. This seems reasonable to do. After all, contracting is common in the tech industry and you won’t be requiring the programmer’s services after the job is complete. It seems like the perfect circumstances to engage a contractor.

Since you’re a responsible business owner, you pay your invoices on time, and at the end of the term, you receive the software as ordered. All is well. Or is it?

Months later you receive a letter in the mail from your contractor, demanding that you cease licensing the software to third parties. The letter states that you have infringed the copyright of the contractor and must pay royalty fees to the contractor or cease licensing it out to third parties. How could this be, don’t you own the software?

As it turns out, when a business hires a contractor to develop a product, the business will own the product but the contractor will own the intellectual property rights in the product. Essentially, this means that the contractor will still control how the product is used, reproduced, and modified. To protect against this, contracts with contractors must contain an assignment clause, whereby the contractor assigns his or her intellectual property rights to the business. Without an assignment clause, your business can be paralyzed by an intellectual property ownership claim of a contractor.

The above scenario isn’t just limited to software; it can happen with almost any type of product. Logos, music, website content, website designs, applications, artwork, a ghost written article or paper, you name it. The contractor will own the intellectual property unless they specifically assign it to you or your business.

There Is a Solution

The above paints a scary picture for businesses. Misclassification of a contractor could result in staggering financial liability, and intellectual property rights claims could permanently hit the breaks on your business operations. Thankfully, a lawyer knowledgeable in employment and intellectual property law can help you avoid the pitfalls of contractors and instead realize the advantages. If you’d like to find out more, feel free to give me a call at 604-629-5401 or email at [email protected].