The line that distinguishes an employee from an independent contractor isn’t always clear. But blurring it can result in serious implications for both the worker and the employer.

With as many as one in four individuals in the workforce either on temporary contracts or working for themselves — according to Statistics Canada, 15 per cent of Canadians worked in temporary jobs and nine per cent considered themselves single-person businesses in 2001 — it’s increasingly common for payroll practitioners to handle pay for workers who aren’t employees of the organization.

Earlier this year the Federal Court of Appeal explored the various means by which the law distinguishes between an independent contractor and an employee in Royal Winnipeg Ballet v. Minister of National Revenue.

The Royal Winnipeg Ballet was appealing an earlier decision of the Tax Courts, which determined that dancers engaged by the ballet company were in fact employees.

The determination was significant in that it would require the ballet company to pay Canada Pension Plan contributions and employment insurance premiums on the dancers’ behalf.

From the dancers’ perspective, the determination meant that statutory deductions would be made at source and, ultimately, they would not enjoy the benefit of writing off business expenses reasonably incurred to earn income from self-employment.

The appeal court carefully reviewed the various tests that have been developed over time to differentiate between employees and independent contractors, beginning with the integration test. This test, first articulated by the English courts in the early 1950s, examines the relationship between an individual’s work and the business that engaged them. If the individual was employed as “part of the business” and their work was integral to the business, they would be considered an employee. On the other hand, if the individual provided services from outside and the services were accessory to the main operation of the business, they were regarded as an independent contractor.

This test has subsequently been discounted, as parties that have developed a “relationship of mutual dependence” are necessarily deemed to have an employment relationship. To replace it, certain courts began applying an “analytical framework” by posing the following question: “Is the person who has engaged her to perform the services performing them as a person in business on her own account?”

If the answer is yes, then the person is an independent contractor. If the answer is no, she is an employee. In order to answer the question, one must ask who exercises “control” in the relationship. For example, does the individual set her own hours, is she free to accept or refuse work, is she subject to company policy and discipline and is she free to hire others? In this regard, the question to ask is whether the so-called employer has the right to exercise control, not
necessarily whether they actually do.

Reference was also made in the case to the historical “four-fold test.” Under this analysis, the following are indicators of an independent contractor relationship:

• control;

• ownership of tools;

• chance of profit; and

• risk of loss.

Chance of profit and risk of loss focuses on whether the individual is simply paid a salary or whether she actually stands to gain or lose depending upon how her services are provided.