New Employee - Classification Rules Hit Ontario Employers

Introduced by the Wynne government in late 2017, Bill 148 - also known as the ‘Fair Workplaces and Better Jobs Act’ - is now in effect across Ontario, impacting every workplace in the province. Amending the Employment Standards Act (2000), Bill 148 implements a number of important changes - including several regarding paid leave - but focuses chiefly on two areas of Ontario’s employment landscape: the minimum wage, which was increased from $11.60, to $14.00 per hour (with effect from 1 January, 2018), and the rules governing the way employers classify their employees.

Focus On Misclassification

The portion of Bill 148 which deals with employee classification has actually been in effect since 27 November, 2017, and represents the biggest potential challenge for Ontarian employers. Under the ESA, it is against the law for employers to misclassify their employees as ‘independent contractors’ - and in doing so avoid various costs such as social security contributions and holiday pay, or entitlements such as sickness leave, and severance pay.

Bill 148 changes the way this kind of misclassification is reported to, and enforced by, the Ministry of Labour. Under previous rules, the onus was on employees to report any suspected misclassification issues themselves. In practice, if a worker believed their employer had classified them incorrectly as an independent contractor, that worker would have had to prove to the Ministry of Labour that they should have been classified as an ‘employee’.

Under Bill 148, however, employers have been given the responsibility of actively providing proof of correct classification. In other words, when an independent contractor is engaged by an organisation, the employer must demonstrate to the Ministry of Labour that their designation is correct - or face penalties. The bill makes provisions for misclassified employees to receive financial compensation, and introduces a range of penalties for employers - from compliance orders, to ESA prosecutions.

‘Employee’ vs ‘Independent Contractor’

With Bill 148 now in effect, it’s vital that employers carefully consider their own classifications protocols, and ensure they understand the ESA criteria for distinguishing employees from independent contractors.

Practically, the ‘employee’ classification applies when at least some of the following criteria are fulfilled:

• The business provides equipment or tools for the worker to carry out their job.
• The worker’s pay is unaffected by the way in which their job is performed - faster work, for example, would not result in higher pay.
• The worker cannot subcontract their work to another person.
• The business has the right to discipline, suspend, or dismiss the worker.
• The business decides what the worker’s professional duties are, what they will be paid, deadlines for their work, and how and where that work is to be completed.

Similarly, ‘independent contractor’ classification applies when at least some of the following criteria are fulfilled:

• The worker owns (or is responsible for) the equipment they use to do their job.
• The worker is legally in business for themselves - that is, they may profit from, or have a risk of losing money from, the work they do.
• The worker determines how and where their work is performed.
• The worker may subcontract all, or parts of, their work.
• The business may end the worker’s contract, but may not discipline them.

Misconceptions & Errors

Plenty of misconceptions surround the employee classification issue - and employers should take the time to become familiar with them to avoid making errors which might result in a penalty. With that in mind, as an employer, be aware that workers may still be considered ‘employees’ if:

• They agree verbally or in writing that they are an independent contractor.
• They do not make statutory deductions (like income tax, CPP, or EI) from the pay they receive.
• They use a personal vehicle to carry out their work.
• They submit invoices to their employer for the work they carry out - and receive payment via direct debit as opposed to paycheque.
• They charge HST for the work they do.

Implementation & Expertise

As an employer, it is risky to assume that your business is compliant with Bill 148 simply because an ESA complaint regarding classification has not been made. Instead, employers should take proactive steps to ensure their workers are correctly classified - both because it is the ethical thing to do, and to avoid any fines or reputational damage. The process should be tailored to the needs of your business, and be both comprehensive, and ongoing. Consider the following steps:

• Train your management, recruitment, and senior-level staff, in the criteria for distinguishing employees from independent contractors.
• Build a comprehensive list of workers currently classified as ‘independent contractors’ - and then perform an individual assessment of each worker to determine their correct classification. Keeping this list up-to-date should be a duty for higher-level staff.
• In cases of misclassification, move quickly to re-classify - and address any financial issues, such as compensation for the employee(s) concerned.

The ESA is a complex legal article and, given the importance of employee classification, it’s a good idea to seek advice when considering reclassification steps. The reclassification process is important, but doesn’t have to be painful - to help your business navigate the ESA regulations, explore your outsourcing options: contacting third-party HR and payroll organisations offers a way to import expertise, and deliver compliance quickly and efficiently.

Find out more about Canada’s business and employment laws, and your legal obligations, with activpayroll’s dedicated Global Insight Guide.