3 Facts You Didn’t Know About Dependent Contractors

Do you hire and work with dependent contractors?

Not every employer realizes that in addition to ‘independent contractors’ and ‘employees,’ there exists a
third worker category called ‘dependent contractors.’ Recognizing this category is crucial to avoid legal
and financial risks, as misclassification can lead to significant penalties and liabilities.

Courts in many Canadian jurisdictions consider this category in their decisions.

What is a Dependent Contractor?

Dependent contractors are independent contractors who rely mostly or entirely on your company for work
and financial security. For example, a freelance graphic designer working exclusively for one company
over several years may be considered a dependent contractor.

Let’s take a closer look at what this means. To help avoid a costly mistake, make sure you understand these three key facts when working with this third category of workers.

1. Their official title is less relevant than the role they perform

When it comes to dependent contractor rights, their duties, responsibilities, and level of self-determination are much more important than how they are identified in their employment contract. If a case ever goes to court, a judge will look at the nature of a person’s role—not their job title. This includes how integrated they are into the company’s operations and their financial dependence on the company.

2. An independent contractor can become a dependent contractor over time

Be careful when working with independent contractors, and remind yourself that roles can change. With time, someone you’ve hired as an independent worker can easily transition to a more dependent position.

To ensure you correctly categorize your contractors, regularly evaluate the nature of your working
relationships by asking these questions. If you find yourself answering ‘yes’ to most, your contractor is
probably dependent:

1. Are you the primary company the contractor works with?

2. Do you control where, when, and what type of work they perform?

3. Does the contractor rely on a company computer or any other tool that you provide to do their job?

4. Is their financial situation secure within the company?

5. Do they fill an essential role in the structure of your business?

6. Do you have a longstanding working relationship with each other?

7. Do you and the contractor rely on one another? For example, do you closely coordinate the projects you’ll be working on? 

A change from independent to dependent often occurs from a series of consecutive exclusive contracts.

3. There are legal obligations to consider when terminating dependent contractors

As an employer, it’s essential to give the dependent contractor reasonable notice when terminating them. Otherwise, there could be serious legal consequences.

This dependent contractor category was solidified in BC via a court case known as “Glimhagen vs GWR Resources Inc.” Lars Eric Glimhagen, the plaintiff, had been with the company for 23 years before he was terminated without just cause in 2012.

Although he was first hired on as an independent contractor, he became Chief Financial Officer in 2010, and his status changed from contractor to employee. Based on Glimhagen’s role and relationship with the company, the BC court ruled that he had been working as a dependent contractor from 2000 to 2010.

As a result, he was awarded $78,000 -- a year’s salary entitlement -- in lieu of proper notice.

What can employers learn from this example? When creating a contract, make sure you and your contractor agree on the exact amount of notice or pay in lieu of notice, that will be required in order to end their engagement. Otherwise, if the contractor is classified as dependent, you’ll need to give sufficient notice or pay in lieu of notice upon termination.

Keep in mind that, at a minimum, you’ll be obligated to follow the Employment Standards Act. This means you’ll need to offer one week of wages for every year the dependent contractor worked for you, to a maximum of eight weeks (BC legislation). 

However, based on the Glimhagen vs GWR Resources Inc. case, a court will likely treat this type of contractor as an employee when looking at notice (or pay in lieu of notice) upon termination.

Common law relies on the Bardal factors, which are:

1. Age
2. Length of service
3. Nature of employment
4. Availability of similar employment

This could lead to a judgement of up to 24 months of notice, or pay in lieu of notice, depending on these factors.

In the recent years there have been some further notable court decisions that have expanded and defined the concept of dependent contractors. 

In 2020, the Ontario Labour Relations Board made a ruling in the case of "Canadian Union of Postal Workers vs. Foodora Inc." The ruling stated that couriers working for the food delivery app Foodora were considered dependent contractors under the Labour Relations Act. This decision granted them the right to unionize. It was one of the initial significant rulings that applied dependent contractor status to workers in the gig economy.

In the 2016 Ontario Court of Appeal decision in "Keenan vs. Canac Kitchens," the court affirmed the importance of determining whether a worker is an employee, independent contractor, or dependent contractor to establish an employer's responsibilities upon termination. The court ruled that the plaintiffs were dependent contractors entitled to reasonable notice of termination due to their long-term and exclusive working relationship with Canac.

Conclusion

Planning to hire a contract worker?

As you can see, it’s easy for the line between dependent and independent contractors to become blurred. To protect your company, make sure you create a clear written agreement with every contractor you hire, and keep an eye on how that person’s responsibilities evolve with time.

And remember: at the end of the day, a judge will always look at the nature of the role and not the job title. An experienced employment law solicitor can help you craft contracts or advise on whether an independent contractor’s status may have changed over time.

Understanding your legal responsibilities as an employer is the best way to look after your staff and your
business—a win-win for everyone.