Many employers are familiar with the distinction between an employee and an independent contractor. However, many may be unfamiliar with a third, legally recognized category known as dependent contractors, which falls between the employee and independent contractor categories.
Make sure to avoid potential legal pitfalls by fully understanding the definition of a dependent contractor for small and medium-sized businesses.
What are Dependent Contractors?
Dependent Contractors are contractors that are economically reliant on one principal. To determine this, a court will consider whether the contractor:
- Is working predominantly for one principal.
- Is subject to the control of the principal as to how the services are provided.
- Uses his or her own tools in the provision of the services.
- Has undertaken any business risks, or expects a profit from the provision of the services.
What Does this Mean for Employers?
Unlike an independent contractor, a dependent contractor must be provided with reasonable notice of the termination of the contractor relationship. If notice of termination is not given, a dependent contractor can sue the principal, similar to how an employee can sue their employer.
Regardless of how the parties choose to label the relationship, the courts will “look behind” the label that the parties use to determine the true nature of the relationship.
For example, there was a recent dependent contractor case, Khan v. All-Can Express Ltd. (2014 BCSC 1429) decided by the Supreme Court of British Columbia.
In this case, Khan, an owner-operator of his own truck, entered into a contract to service Ace, a courier company. Khan signed a contract which stated that he was an independent contractor. The contract also stated that he was responsible for the maintenance of his truck and related expenses. He also had to hire a replacement driver when he was not available and he did not receive any employee benefits or vacation time.
Despite the above, the court found that Khan, who had worked for Ace for five years, was a dependent contractor and awarded him four months of notice. In deciding that Khan was economically dependent on Ace, the court noted the following:
- Owner/operators, like Khan, had long term relationships with the company.
- Khan worked on a full time basis.
- Ace did not want Khan to work for competitors.
- Khan had to wear the Ace uniform and display the Ace logo on his truck.
- Khan had to follow Ace’s policies.
To minimize liability in the event a contractor is found to be a dependent contractor, employers should take the following steps:
- Have clear, concise, written agreements.
- If the contractor is hired for a fixed term, the contract should clearly state the start and end date. The contract should also provide a mechanism for the parties to end the relationship prior to the end of the fixed term, if they choose to do so.
- If the contractor is hired for an indefinite period, the agreement should have a termination clause which provides for reasonable notice of termination
- The termination provisions of the contract should reflect, at a minimum, the notice periods set out in applicable employment standards legislation.
- To the extent possible, try to ensure the contractor is not working exclusively or predominantly for just one organization.