According to a report released last week, more Canadians are joining the ranks of the self-employed, with self-employment climbing 3.6% in the last year. It seems that employers are reluctant to offer permanent positions and expand payrolls in times of economic uncertainty. In addition, many older workers seem to like the idea of being their own boss. Self-employment often comes with more flexibility, but it can also bring with it the absence of retirement or health benefits and some other potentially lesser-known legal risks.

For “true” self-employed professionals, who, for example, own their own business and do projects for multiple employers, this is unlikely to pose much legal risk.  However, what is more prevalent is the practice of camouflaging what is really an employment relationship by calling it a “contract” and treating the individual as an independent contractor.  Why does this matter?  Because the legal risks can be significant.

Employers have a responsibility to deduct and remit income tax from their employees’ pay; a failure to do so can result in a tax re-assessment, and a requirement to remit with interest and penalties to boot.  Similarly, employers are required to deduct and remit premiums on account of Canada Pension and Employment insurance for their employees and a failure to do so can have equivalent consequences.  Employees also have entitlements to things like paid vacation, overtime and potentially significant severance when the relationship concludes.

Just because someone asks to be self-employed does not make it so, nor does the fact that they have an incorporated company or they have signed a fancy “Independent Contract.”  Rather, any governing body considering whether someone is truly an employee or an independent contractor will consider all of the elements of the relationship and make a determination.  No one element is likely to be determinative of the relationship; rather there will be a consideration of all elements and a decision as to whether the existing categorization of the relationship is appropriate.  As we like to tell our clients, “if it walks like a duck and talks like a duck, it’s probably a duck”, or in this case, the individual is probably an employee.

So the trend towards self-employment is an interesting one, as long as everyone goes into this with eyes wide open.  Employers would be short-sighted to use self-employment as a means of avoiding employment-related obligations without giving serious thought to the work that the individuals in question will be doing and the manner in which they will be doing it. It is worth asking themselves if this is just a way of masking what is otherwise a true employment relationship.  Similarly, the fact that an individual likes the perceived freedom of self-employment should not be enough to persuade an employer to treat the individual as a contractor, again without considering if this is an appropriate categorization of the relationship.  If the employer is really trying to avoid costly obligations like benefits or severance, these can often be avoided in far safer ways with clever drafting of term or temporary employment contracts.

Christine Thomlinson