What is a “Dependent Contractor” Anyway?
We often provide advice on whether an individual is performing services as an independent contractor or an employee. The implications can be significant, especially for an employer who gets it wrong: there can be serious tax liability in addition to employment law liability. Setting up a valid independent contractor relationship requires not only strong contracts, but also careful thought and planning about how the services will be provided and how the relationship will operate.
What if you’ve done all of that planning to ensure the person is not operating as an employee, only to be told they still aren’t an independent contractor – they’re something else entirely?
The first time I encountered the phrase “dependent contractor,” I thought I had misheard. Isn’t a dependent worker just an employee? The answer, it turns out, is no. There are two types of contractors, dependent and independent, neither of which is an employee. It matters which one you have. While neither kind of contractor is entitled to income tax withholdings, EI or CPP contributions, or overtime or vacation pay, there is one significant difference between them. While independent contractor relationships can be terminated at any time, dependent contractors are treated like employees on termination: they are entitled to reasonable notice or pay in lieu.
How do we figure out whether a contractor is dependent or independent? According to a recent decision of the Ontario Court of Appeal, Thurston v. Ontario (Children’s Lawyer), the hallmark of a dependent contractor is that they work exclusively or nearly exclusively for a single client. Because of the exclusivity, the contractor is economically dependent on the client, even though they’re still not an employee (for example, because other than the economic dependence, they operate like an independent business rather than like a supervised employee).
In Thurston, the court emphasized the importance of exclusivity. The contractor was a lawyer who performed services for a government agency for 13 years. During that time, her work for the agency accounted for around 40% of her annual revenues. She argued that this made her economically dependent on the agency, so it should be required to provide reasonable notice when it terminated her. The court disagreed. Every business is dependent on its clients, and the loss of a major client will always have a significant impact. If that were enough to make someone a dependent contractor, then nearly every small business in Ontario would be one. Instead, the court found, what makes someone a dependent contractor is working exclusively or nearly exclusively for a single client. That is what makes the contractor so economically dependent as to be entitled to a severance package when the relationship ends.
In general, we recommend that organizations hire employees rather than contractors. However, an organization that wishes to retain independent contractors should take steps to ensure that the contractor not only has the right to work for other clients, but is actively doing so. This means, for example, not giving any contractor full-time work, so that they have time to work for other clients as well. Otherwise, your supposedly independent contractor could actually be a dependent one, and could be entitled to a severance package.