For the first time in the history of Canada, the court system has certified a class action lawsuit regarding the classification of independent contractors. Approximately 7,000 sales reps for Just Energy claim the company misclassified them as independent contractors when they were actually employees. As of March 2017, the case has not been heard, but the implications are important for small business owners to understand.
Overview of the Case
Haider Omarali worked as a sales agent for Just Energy for 18 months. After leaving the company, he brought forward an individual suit that eventually turned into a class action case with 7,000 other sales reps. During his employment, Just Energy classified Omarali as an independent contractor, but he alleges he was treated as an employee and his position didn’t meet the criteria of independent contractor. To give an example of Omarali’s side of the case, during his first month of working for the company, he worked 288 hours and earned only $956.40. That’s only $3.32 an hour, substantially less than the province’s minimum wage of $11.25 per hour at the time. Independent contractors are not protected by the laws of the Employment Standards Act, and if Omarali was truly an independent contractor, he was not entitled to minimum wage or benefits such as coverage through the employment insurance plan. On the other hand, if Omarali was misclassified, he should have been considered an employee, and in that case, he should have received minimum wage, holiday pay, vacation time, and overtime.
Independent Contractors vs. Employees
Independent contractors are basically self-employed individuals. They don’t necessarily need to have lots of clients, and they may legally collect money from the same company repeatedly. When that happens, though, the relationship should be closer to that of client and business owner, rather than employer and employee. For businesses, the main benefits of hiring independent contractors are that it can be cheaper, and there’s no long-term commitment. The company simply cuts a cheque for the worker, and it doesn’t have to worry about payroll issues, withholding tax, or matching Canada Pension Plan contributions and employment insurance premiums. For independent contractors, the benefit is a self-directed work space with a lot of flexibility. That said, businesses can’t just classify a worker as an independent contractor so they can reap the benefits. The Canada Revenue Agency has strict rules on categories for workers.
The Four-Point Test
The CRA has a four-point test to help workers and businesses figure out the distinction between independent contractors and employees. The first point is control. With employees, the employer has the right to dictate when, where, and how the work should get done. Independent contractors have personal autonomy with these elements. The second point addresses tools. As a simple rule of thumb, independent contractors provide their own tools, while employers provide the tools for employees. In some cases, employees may provide their own tools, but that’s usually small, inexpensive supplies, rather than large capital purchases. Employees get paid no matter what, and they don’t shoulder much profit or loss risk. In contrast, independent contractors usually shoulder their own risk, and that’s the third point. Independent contractors risk equipment breakages, not having enough clients, and other financial risks, but they also have more control over their income and profits. The fourth point deals with integration. This is a nuanced point that involves several elements from the other three points.
Allegations of Misclassification
In the Omarali vs. Just Energy class action, the plaintiffs claim they did not have the autonomy of independent contractors. Just Energy told the sales associates when and where to work. It also required them to attend extensive training, wear a company uniform, and use a company script when pitching customers. Ultimately, the courts will decide how the workers should have been classified, and the case could have severe repercussions for Just Energy.
If the plaintiffs are successful and the courts judge that the workers were misclassified, Just Energy will likely face a large amount of financial penalties. The company may be obligated to retroactively compensate employees for hours worked. For instance, if Omarali was an employee, he should have been paid minimum wage; for his first month of work alone, the company should have paid him $3,240, which is over $2,000 more than it paid him. That’s just a single employee for a single month. With multiple employees over several years, the company could end up owing a lot of back wages. That’s also not the only issue. When workers are independent contractors, they pay their income tax and Canada Pension Plan contributions on their own. Because of that, the workers don’t need to worry about owing anything. Just Energy, in contrast, would need to remit matching CPP contributions and EI premiums, and on top of that, it may face penalties and fines. An economic shift from employees to independent contractors is happening quickly thanks to companies such as Uber and money-earning platforms such as Airbnb and Upwork. As a business owner, if you plan to hire a large body of independent contractors, it’s critical to ensure they are correctly classified, and you may also want to watch cases like this so you can see what’s happening legally. As an individual, it’s important to ensure you are classified correctly so you don’t compromise your rights or lose benefits.