Startup and video game law, from a Canadian and U.S. perspective
Employees Disguised as Contractors
As your company grows, you may be looking to expand your team and add to your workforce. When hiring additional employees or engaging independent contractors you need to be well-aware that an independent contractor may actually be considered an employee, regardless of how you label the person.
Employees are entitled to rights pursuant to the applicable Employment Standards Acts (based on the province the employee resides) such as: (1) vacation pay; (2) overtime pay; (3) statutory holidays; (4) notice period or payment in lieu of such notice period upon termination; (5) severance pay; and (6) employment insurance benefits.
Independent contractors are not entitled to such benefits. However, if a government authority determines that an independent contractor is actually an employee based on the factual relationship between the parties, the independent contractor will be entitled to all of the above rights and there may be penalties that come with such determination.
There is no one test to determine whether a worker is an employee or an independent contractor, but here are some factors to consider when engaging an independent contractor:
Level of Control: Does the worker set his/her own hours of work? Does the worker determine how the services are to be completed?
Equipment: Is the worker required to provide his/her own tools and equipment for work?
Sole Income: Is the employer the sole source of income for the worker? Is the worker prohibited from taking other jobs?
Subcontractors: Is the worker allowed to engage subcontractors for the services?
Opportunity for Profit: Is the worker taking on a chance for profit and a risk of loss?
Compensation: Is the worker providing monthly invoices to the company?
The above factors may all be considered when determining whether a worker is an employee or an independent contractor. If a worker who you presumed to be an independent contractor is determined to an employee, you may face fines and penalties including and related to unpaid vacation and overtime pay, severance pay, employment payroll taxes and employment insurance deductions and remittance. All of which are costly, so way the least!
In summary, you will need to assess the relationship between the company and each of its potential workers before determining whether to commit to an employee or contractor relationship, something that your legal team is best suited to assist with to avoid costly penalties down the road.