The use of independent contractors has become increasingly prevalent in modern business operations. From software development to marketing strategies, businesses rely on independent contractors to perform a wide range of tasks. 

However, it is important to recognize that engaging with independent contractors may carry legal risks and challenges. To mitigate these risks, it is crucial to establish clear and comprehensive legal guidelines right from the start of the engagement. 

By doing so, businesses can proactively address potential issues and ensure a smoother working relationship with independent contractors.

This article will discuss ways to help your business navigate the path of hiring independent contractors and limit exposure to legal liability.

Identify the Relationship

The first thing a business or individual should do is determine whether a worker is an employee or an independent contractor. This classification is important as it influences their legal rights and responsibilities. 

The Supreme Court of Canada set down a guiding test in the case of 671122 Ontario Ltd v Sagaz Industries Canada, 2001 SCC 59 (Sagaz). In Sagaz, the key question was whether the worker was performing services as a person in business on his or her own account, or was working primarily in the interest of the employer.

To answer this question, courts will consider the following non-exhaustive factors:

• Control: Assess the level of control the employer has over the worker’s activities. The more the employer controls, the more likely the worker will be considered an employee.
• Equipment and Helpers: Does the worker supply their own equipment and hire their own helpers? Independent contractors typically bring their own tools and have their own teams.
• Financial Risk and Profit: Assess the worker’s level of financial risk and profit opportunities. Independent contractors are usually at financial risk and stand to profit or lose based on their performance.
• Responsibility for Investment and Management: Think about the worker’s investment and management responsibilities. Independent contractors typically have a more significant degree of independence and control over their work processes.
• Exclusivity: Does the worker only work for one employer? This factor can be key when differentiating between dependent and independent contractors.

If you find yourself still unsure regarding the worker’s status, it is best to seek assistance from an employment lawyer. Both workers and employers need to understand the implications of each employment category, which affects employment entitlements, legal obligations, and taxation.

Establish a Comprehensive Contract

An effective way to reduce exposure to legal disputes is by creating a comprehensive and clear contract that outlines the terms of the relationship between your business and the contractor. An independent contractor agreement should include:

• The nature of the relationship: Clearly state that the worker is being hired as an independent contractor, not an employee. Note, however, that courts consider the substance of the relationship, not just what the client and contractor call themselves.
• Scope of work: Clearly define the tasks the contractor will be performing, the standards of performance, and the timeline for completion.
• Payment terms: Outline how much and when the contractor will be paid.
• Intellectual Property: Clearly define who will own the rights to the work product.
• Termination provisions: Clearly state under what circumstances the contract can be terminated early, and any payment obligations for an early termination. Failing to draft clear termination provisions can result in your business having to pay the contractor the balance of a fixed-term contract.

Implement Proper Payment Practices

Payment practices are a fundamental part of the contractor-client relationship and can become problematic if not adequately managed or followed. Implementing proper payment practices from the start not only helps avoid disputes but also contributes to maintaining a harmonious relationship with the independent contractor.

Here are a few key practices that can prevent legal disputes from arising:

• Timely Payments. 

Proper payment practices when working with contractors. It is important to adhere to the payment schedule outlined in the contractor agreement. Whether payments are based on project milestones, product delivery, or regular intervals, honouring the agreed-upon schedule demonstrates respect for the contractor’s work and professionalism. Delays in payment can lead to disputes and harm the working relationship between parties.

• Handling of Taxes. 

As independent contractors are not employees, they are responsible for their own income tax and self-employment tax obligations. Unlike an employer-employee relationship, you should not withhold taxes from a contractor’s payment. 

• Expense Reimbursements. 

While independent contractors typically cover their own expenses, there may be situations where you agree to reimburse specific costs. Any agreement on expense reimbursements should be clearly defined in the contract. It should specify what types of expenses are eligible for reimbursement, how the contractor should document these expenses, and when and how reimbursement will be made.

• Payment for Additional Work. 

Sometimes, a project might extend beyond its initial scope, requiring additional work from the contractor. It’s important to discuss and agree on how additional work will be compensated before the contractor begins the extra work. Make sure this agreement is documented, either in the initial contract or in a separate written agreement.

Timely payments, correct handling of taxes, clear guidelines for expense reimbursements, and agreements on compensation for additional work can all contribute to a smooth relationship between businesses and independent contractors. 

Conclusion

In this rapidly evolving business landscape, the inclusion of independent contractors is becoming increasingly commonplace. However, this comes with a unique set of challenges, primarily legal disputes that can complicate the business relationship. Limiting exposure to legal liability requires a proactive and strategic approach from businesses.

Accurately identifying the nature of the relationship between the business and the worker is paramount. Ensuring the worker’s status aligns with the duties and terms of their role helps avoid misclassifications, which can avoid legal complications. 

Establishing a comprehensive contract is crucial. A well-drafted agreement that clearly outlines the nature of the relationship, the scope of work, payment terms, intellectual property rights, and termination provisions can provide a solid foundation for a positive business relationship. Maintaining proper payment practices serves as another key preventative measure against disputes. 

Contact Us

If you are an employer, employee, or contractor and have any questions, our team of experienced lawyers at Achkar Law can help.

Contact us today at 1 (800) 771-7882 or email [email protected], and let us help you find the solutions you need to move forward.

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