Does the use of independent contractors save costs?

'We almost never recommend fixed-term agreements, because the risk is so high': lawyer talks about risks of contracted labour

Does the use of independent contractors save costs?

Is using contingent workforces such as independent contractors a solution to labour shortages in Canada?

A recent report suggests it’s a popular approach for staffing, with 25% of Canadian employers planning to hire more temporary or contract employees over the next 12 months, says Hays Canada, and 45% keeping their headcount for this group the same.

However, there are important considerations for HR and employers before embracing the strategy.

HRD spoke with employment lawyer Ioana Pantis, partner at McMillan in Toronto, to find out what employers should be aware of before choosing to contract work on an “on-demand” basis instead of using permanent employees.

“I don’t think employers should think of non-permanent workspaces and on-demand skills as a blanket solution to keep costs down,” Pantis told HRD.

“Yes, they may offer some flexibility and be cost-effective in some cases, but in other cases, not implementing a legally compliant employment strategy could be more costly.”

Misclassification a legal pitfall of independent contracts

When engaging an unfixed workforce, such as with independent contractors, Pantis said, there is a risk of misclassification that can be costly for the employer.

“If an employer engages an independent contractor, but in reality they're an employee or a dependent contractor, then that comes with different exposures, like not having complied with employment standards legislation, terms of common law notice exposures, not having paid taxes, and other risks,” she said. “So, it's really important to assess the relationship – is it truly an independent contractor one, or is it an employment one?”

When assessing a new employment relationship, there are many factors to be considered, Pantis explained, such as if the individual provides services to other entities, if their compensation is fixed, or if they use their own tools, laptops or platform services.

Another important factor is whether the employee is doing a specialized service, or work that an employee of the company is already providing, she said.

Even willing independent contractors can claim misclassification

Crucially, even if an individual has requested in writing that they be contracted as an independent contractor, they can still come back after the contract has expired and claim they were misclassified, which could negate any termination clause in their contract.

“When the person comes back and says they were misclassified, they actually become entitled to common law reasonable notice, which ranges from three months to 24 months and sometimes even more, depending on how long they've been employed or engaged,” said Pantis.

“It would have been better in that scenario if the employer had from the outset analysed the relationship with legal advice and come to the conclusion that it would have been better to engage that person as an employee.”

When engaging an individual as an employee, she explained, the employer can still include a termination clause that would minimize termination exposures and prevent them having to pay common law reasonable notice.

Fixed-term contracts can have big litigation costs

Many employers believe that using fixed-term contracts instead of permanent employees will save them money or help to keep to a budget, but the reality is that they can be very expensive if the term ends early.

“If it's a one-year fixed-term and at six months the employer decides it's not working out and they need to end the relationship, without an enforceable termination clause, they automatically pay out the remaining six months. So it can be extremely expensive,” Pantis said.

Further, duty-to-mitigate rules do not apply in these situations, she noted. This means that if the individual in question finds other employment immediately after their contract is terminated, the employer will still be responsible for paying the full remainder of the term.

‘Work from anywhere’ policies can be risky

A separate report from Hays lists using non-permanent work locations, offshore work packaging and other strategies of contingent workforces as ways for organizations to increase agility and quickly onboard skills they need.

However, these strategies can also be a minefield of possible compliance risks. For this reason, it’s important for employers to be aware of where they’re engaging contractors and employees, to be sure they are complying with provincial or territorial regulations.

“It can be risky to allow an employee to work from anywhere in Canada or even abroad, because it's unclear which employment, human rights, health and safety worker’s compensation, and other laws apply to them,” Pantis said.

“Also, change in location can invalidate a termination clause that is initially tied to a particular province’s employment standards legislation, which in the end can cost the employer more in common law reasonable notice.”

Traditional employment models can be effective

Traditional employment models such as employing part-time employees with flexible work arrangements built into their contracts is still a good option for many situations, Pantis said.

Contracts can specify an “on-demand” relationship with limited hours or low guaranteed hours, fluctuating shifts or no guaranteed shifts, so the employer isn’t obligated to provide them constant work.

“And it doesn't come with the risk of entering into a fixed-term agreement, not having a termination clause, or your termination clause gets outdated partway through and then you have to pay out the balance of the fixed-term,” she said.

“We almost never recommend fixed-term agreements, because the risk is so high.”

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