Wanna save it for later?
Sign up for the Goodlawyer Business Master Class and we’ll send the whole thing to your inbox for easy access.
Lesson 4: Hiring Employees & Contractors
You’re either growing your business and need to learn a little bit more about hiring, or you’ve read the first 3 Goodlawyer Guides and are in too deep to quit now. Good for you, nobody likes a quitter!
This guide will elevate your understanding about employment law nuances so when you’re in a position to hire some help, you do it in a way that is conducive to your business.
Topic 1: Employment Law in Canada
When we use the term “employment law”, there’s a sense that our readers and members will know what we mean. Most of us have held down a job for a certain amount of time and are familiar with things like vacation days, sick days, safety standards, etc. It’s a great starting point to have because it introduces some of the concepts, but things can look quite a bit different from an employer’s point of view. On top of that, not all working relationships are the same, and different working relationships necessitate different legal obligations. You can have volunteers, employees, or independent contractors and each of those relationships mean different things for your company.
Employment Standards and Case Law
In Canada, employment law is generally governed in two ways. First, our legislators and governments have created a baseline level of conduct which employers have to abide by. The policy justification being that employers are usually in positions of power at the negotiating table, and the law is there to protect “the little guy” (in this case, the employees).
The second place that employment law shows up is in the use of the contractual documents aptly named employment agreements. Remember the contracts topic we talked about in Lesson 2? Contract law and employment law have a very close, intertwined relationship. All of the responsibilities that an employee has, how the employer will act, what their pay will be, and what can happen in the event of a dispute should be negotiated and ultimately set out by the two parties in the form of a contract.
The relationship between the Employment Standards Legislation and contract law is also important to note. The Legislation generally sets out the baseline of what is legally expected of employers in their respective provinces. Although there is some variance across provinces, the common law, or what is determined by the courts as fair is often more rigorous than the legislation. If an employer fails to meet the standards set out in the legislation, courts will step in and impose common law rules on the employer, meaning that the penalty for failing to meet the legislation is greater than the standards set out in the legislation in the first place.
As an employer it is crucial to strike a fair, equitable, and just balance between the two. There have been some examples where, based on extenuating circumstances, some employers have had to pay the more expensive common law route even though they complied with the minimums in the employment legislation. If your circumstances entail that your employee deserves more than the legislative baseline, you will want to make sure you are meeting those higher standards. It may seem counterintuitive or even unfair to the employer that they have to proactively know whether the legislative minimums will be enough, but policy reasons and employee rights have been consistently protected through our legal system, and for good reason. Having the power of an employer comes with responsibilities and obligations. Period.
Other General Considerations
The big one is to get your employment agreement in writing. It’s always a good idea to have a legal document that you can refer back to, even if you can legally have a valid verbal contract.
There is a general implied term in the employment contract that employers will not make fundamental changes to the employment nature without notice to the employee, which is particularly important for start-up companies. Chances are that you may not know the full details of what your employees will do, and early employees may quickly move into high leadership roles as your company grows or even pivots. Contracts go both ways, and headlocking employees via contractual terms is not conducive to flexibility — which is important in start-ups.
Another important area of employment law is hiring and managing employees based on any form of discriminatory practice. Human rights protect people against discriminatory treatment, especially in the workplace. The prohibited grounds include race, religious beliefs, colour, gender, gender identity, gender expression, physical disability, mental disability, age, ancestry, place of origin, marital status, source of income, family status, and sexual orientation. In addition, employers are under a duty to accommodate such circumstances so long as it does not cause undue hardship. To illustrate, if an individual’s religion prevents them from working past sundown on Sunday nights, you must accommodate that individual’s situation so long as your business doesn’t suffer for it.
Topic 2: Employees vs. Contractors
These are the two main ways that working relationships take form. Both of these are dictated specifically by what is set out in the employment or independent contractor agreement, so both are subject to contractual law (you read the guide for Lesson 2, right?).
For all intents and purposes, you may be thinking that an independent contractor and employee are essentially the same. You pay an individual some money, they perform a service, and until something happens to suggest that the relationship won’t work, the cycle continues. While it makes sense to think about these relationships in simplistic terms, there are different legal obligations for an employer hiring employees vs independent contractors.
By now, you know that Goodlawyer always recommends being prepared and having certainty in your business operations. So knowing the differences between the two is extremely important to avoid having disgruntled employees and unwelcome letters from the Canada Revenue Agency.
How To Determine
To figure out if an individual in your company is an independent contractor or an employee comes down to a sort of legal litmus test. We’ll try not to get too into the weeds, but making sure you’re familiar with these factors is really important when you’re structuring your working relationships. Whether someone is an employee or independent contractor is a question of fact, not interpretation up for debate.
The first angle to look at is the subjective intentions of the two parties entering into the work-relationship. The best way to do this is to look at the wording of the contract (you better have a contract). Does the agreement say that you and the worker will have an employee relationship? Or is the agreement clear that it is merely a contract for services?
The second step is based on the reality of the situation mentioned at the start of this subsection. Does the objective reality of the situation support the subjective intentions of the two individuals? Our Canadian courts have provided us a great list of four factors to determine what the circumstances really are. Like with most “legal litmus tests” the existence (or absence) of any one of these factors is not determinative on its own. It’s a balancing act that takes a look at the entirety of the circumstance before coming to a decision. So, the four factors:
Ownership of Equipment: Does the individual in question bring their own tools to perform the job? It could be carpentry tools or their own laptop, but if they do, that would lean them towards an independent contractor. However, if you as the business owner are providing them with everything they need to succeed, it goes towards an employee classification.
Control over the Worker: What is the level of autonomy that the worker has? Are they allowed to set their own hours, can they hire subcontractors to accomplish whatever task is set out for them when they were hired? Can they flat out refuse to do something you want them to do? Anything that points to the direction of more independence from the worker will shift the balance over towards being an independent contractor. If you tell them how and when to work, probably an employee.
Risk of Loss: This factor looks at the possible downsides of the worker’s actions and their integration into the team. In the event that they are sick, or are unable to come into work that day, does the whole operation come to a screeching halt? If the worker in question is a critical part of your team, they’re again leaning towards the employee side of the spectrum.
Opportunity for Profit: Here’s the flip side to the factor #3. Courts will look to the form of compensation that a worker receives. Are their wages such that they are stable (i.e. a salary compared to hourly pay)? Do they get sick days and paid vacation days? Obviously there are employees who receive an hourly wage, but that just lends itself to the idea that one factor is not fully determinative of the entire test!
Most times, the employer and the worker will have a clear understanding of the relationship at the outset, but that’s not always the case! In the event of conflicts, and if you want to do a quick status check on your own, run through those four factors listed above! If it looks like a duck and quacks like a duck, it’s probably a duck!
Of course, it’s not always so easy to determine. A proper legal answer would require examination of the entire circumstances of your business, what industry you operate in, the complex relationship you have with the worker in question, and an application of the factors and legal tests outlined above. Only professional and experienced lawyers can provide that kind of perspective to you so make sure you know your limitations before coming to decisions on your own.
Consequences of Classifying an Independent Contractor or Employee
Independent Contractors have no entitlement to the relevant Employment Standards legislation. That means the benefits and protections that are given to employees are not provided for independent contractors. Independent contractors have to pay their own way meaning that they invoice the business they work for and pay their own taxes to the government.
Employees on the other hand are allowed overtime pay, personal emergency leave, parental leaves, termination and severance pays, and are paid with wages. Those wages include deductions like CPP (Canada Pension Plan), EI (Employment Insurance), and Income Tax taken by the employer (plus filing the correct government forms).
Employees (occasionally independent contractors as well) also open up the door to vicarious liability. Vicarious liability is when injury or damage caused by an employee can be passed onto the employer themselves. The policy rationale being that the employer has deeper pockets than an employee to effectively mediate any damage they cause. Not all employees can trigger vicarious liability, but it is important to speak to a lawyer to make sure you know where your liability risks lie.
A good way to think about the consequences of independent contractor and employee relationships is the amount of work that it takes for a business to hire, train, and deal with the operations of employees vs. contractors. Both have benefits and disadvantages, but depending on your specific situation, it will be wise to seek some professional advice before moving forward with a big step in your company.
Topic 3: Termination
If you’ve decided to move forward with hiring an employee over an independent contractor, this and the next topic will be important considerations to keep in mind when the working relationship has come to an end. We’ve discussed the contractual and legislative relationship between employers and employees, and that plays a key role in termination and wrongful dismissals.
As always, it’s important to have everything set out at the start! When there is a valid employment agreement between an employer and an employee, the employer may, if the terms in the employment agreement permit, terminate the employee without just cause (provided that reasonable notice is given). “Just cause” is a legal term that means an employer is justified in terminating an employee without providing reasonable notice or payment in lieu of notice. Those two sentences are really important and are often a common misconception that we hear, so we’ll break it down a little further.
An employer can terminate an employee with or without just cause. If an employer terminates an employee with just cause, then there are no legal ramifications for the employer, provided that they weren’t humiliating the employee while letting them go. Just cause can take form in serious misconduct by the employee or habitual neglect of their duties.
If an employer terminates an employee without just cause, they are legally obligated to provide the employee reasonable notice of termination, or pay in lieu of reasonable notice (we will get into what makes a notice reasonable).
Topic 4: Wrongful Dismissal
So what happens if an employer fails to meet their legal obligations when terminating employees? Wrongful dismissal occurs when an employee is dismissed or terminated by their employer and was not provided reasonable notice, or where an employee was inappropriately terminated for just cause.
While the concept of reasonable notice was introduced earlier, we want to expand upon it now as the term “reasonable notice” is the language that courts will use to describe the compensation that a wrongfully dismissed employee will receive. Reasonable notice is often conflated with the idea of employee pay in lieu of reasonable notice, as there is usually no way for an employee to retroactively go back and work the hours they would have during the notice period.
What is considered reasonable notice is set out in the Employment Standards codes in the various provinces. The specifics and nuances of reasonable notice varies by region due to the different codes adopted by different provinces, but the general rule is that you get a certain amount of weeks or months depending on how long you’ve been working for your employer. In the event that notice is not given, or that the notice given was not reasonable enough, courts will not hesitate to impose the common law (i.e., different requirements than set out in the Code) to adequately compensate the harmed employee, and they are often heavier than those outlined in the Code. The factors that the courts will look at are as follows:
Character of Employment: What kind of position are you in? Are you highly specialized and technical so that you are indispensable to the company you work for? The more the employee can carve out their own area of work in the company, the longer the reasonable notice period will have to be.
Length of Service: This one is pretty straightforward. How long have you been with the company? Was the service uninterrupted? The longer an employee has been part of the company, the more notice they are entitled to.
Age: Straightforward as well, how old was the employee when they were let go? Which coincides closely to the...
Availability of Similar Employment: How scarce is a comparable position to the one that the employee just lost? Courts can look to economic factors as well as the character of employment discussed above to examine availability. If the employee was let go from a senior position, the likelihood of finding a similar position could be quite difficult, therefore entitling them to more notice.
Similar to the legal litmus test to determine if the individual is an employee or independent contractor, no one factor here is more important than the others. In any individual case, one single factor could exert a greater influence on the amount of notice required as reasonable. The common misconception is that an employee will automatically receive one month's notice to every one year of service to the employer. Courts have addressed this point and rejected it saying that to follow this rule would unduly make the length of service more influential than the other factors instead of looking at all of them holistically.
There is also an “upper limit”, generally capping any reasonable notice periods to 24 months even for the longest standing and most senior employees at the place of work. However, this is only awarded in truly extenuating circumstances so the limit is rarely reached in any employment law disputes. Additionally, with court costs and the amount of time sunk into the dispute resolution process, you will want to avoid this process from the beginning and make sure your policy of providing reasonable notice is solid from the start.
As your business grows and begins to be too much to handle for yourself or your founding team, the extra hands you hire can make or break your overall success. Knowing what your company needs exactly may be difficult as a start-up, especially if you’re flying by the seat of your pants. However, the best practices are to really sit down and try to outline a plan, because you want to make sure that any individual you hire or contract services from is being utilized to the best of their abilities.
Setting everything out early, yet ensuring that there is enough flexibility to adapt to situations as they arise is critical for long-term success. Consulting with a knowledgeable and effective employment lawyer in your province can protect you and your workers in the event of any damage caused by hired hands. It can also instill clarity into tricky situations, while simultaneously ensuring that both your company and the worker are on the same page as to what is expected of one another.
Want to keep learning about this topic before moving on to the next lesson? Here are some more great resources!
You can see all of our fixed-price services here.