What do Uber, Amazon, Google, Lowe’s, and FedEx all have in common? They’ve all been sued for millions of dollars for misclassifying independent contractors.
Here in Canada, things aren’t quite that dramatic, but with the rise of the gig economy, every company will soon have to make decisions about how they classify non-full-time employees. And like Uber, there will be consequences for those who don’t comply.
What is the Gig Economy?
Unlike traditional freelancing, the gig economy is characterized by online marketplaces such as Upwork, TaskRabbit, and Fiverr, where talented individuals bid for “gigs”, putting themselves in charge of their schedule and pay. But it’s not always mediated by a platform. It’s also just a general mindset of choosing self-employment over working “for the man” (maybe a generation was scarred by the thought of making TPS reports).
Whatever the root cause, the gig economy is here to stay, with 70 percent of millennials either currently freelancing or intending to freelance in the future. The Washington Post even declared that “side hustles are the new norm” in a recent headline. So what does this mean for Canadian employers?
The danger of misclassification
There is a hefty price to be paid for misclassifying freelancers. According to Canada Revenue Agency, “An employer who fails to deduct the required CPP contributions or EI premiums has to pay both the employer's share and the employee's share of any contributions and premiums owing, plus penalties and interest.”
For companies that rely on a large contingent or independent workforce (apart from an employment agency), the potential costs are huge. Right now, Just Energy (a major Canadian energy company) is being hit with a class action lawsuit for misclassifying 7,000 independent contractors. Since each contractor will be treated as an individual offence, Just Energy will have to pay hundreds of thousands of dollars per contractor, if found to be in violation.
So how can Canadian companies stay in the clear? There are three steps, helpfully outlined by the Supreme Court of Canada
The three steps to staying compliant
Though there are no hard and fast rules as to what constitutes a misclassification, there are four general guidelines that the Supreme Court of Canada has compiled over many years of trying similar cases. They involve passing three “tests”. If you can set up your freelancer relationships in a systematic way to pass these tests, you will likely be safe from government scrutiny.
Does the employer tell the contractor how to do their work, and when and where they can do it? If so, the contractor is being treated like an employee.
How to comply:
Once you give a freelancer an assignment, let them complete it however, and wherever they want.
The fourfold test
This is the most comprehensive test, involving four factors: (1) control; (2) ownership of the tools; (3) chance of profit; (4) risk of loss. This has also been called the “Entrepreneur Test” because it asks the question, “Is the freelancer in charge of their work, and if they fail, is there consequences?”
How to comply:
Think of hiring a freelancer like any other service professional. If you hired a mechanic, you wouldn’t provide the tools yourself, and you wouldn’t pay them if they couldn’t fix your car. Treat them as if they were their own business (because they are).
The integration test
Is the contractor performing a service that is integral to the business? If so, they are likely doing the work of an employer.
How to comply:
Contractors may be hired to assist the core functions, but not to perform them alone. Audit whether that freelancer you’re thinking of bringing on board is going to be merely “helping” with the business, or whether they’ll be performing an integral function.
Putting it all together
Complying with the CRA in regards to the changing economy may be less straightforward than you thought. Hiring someone from Upwork to complete a task may still land you in hot water (as it did for Google) if you fail to pass the three tests.
Creating a structured process for hiring and managing freelancers, complete with agreement templates that stipulate the limits of the relationship, will go a long way toward keeping you free from CRA scrutiny.
But freelancers aren’t the workers who require a structured set of expectations. Do you have a clear strategy for outlining standards, guidelines, and expectations for your employees? Download our free Performance Measurement & Management Guide Book today to get moving in the right direction.