I hired this person to work in my business. They asked to be a contractor. They wanted the flexibility and the write offs. It didn’t work out and now they want severance. What?! I don’t owe them anything! … do I?  

They hired me as a “contractor” but always treated me like an employee.  Then they let me go with no notice. Can they really do that to me!?

These questions come up all the time and the lawyerly answer to both is “it depends.” Why? Because the law says that even if you have a “contractor agreement” with someone, you can owe them severance. So when is a “contractor” entitled to severance? We have to look beyond the agreement and examine the true nature of the relationship between the company and the “contractor” to answer this. It often boils down to whether the contractor was really running their own business or whether they were really working for the company. Key factors are:

  • Exclusivity – Was the contractor able to work elsewhere? Did they? How dependent were they on the income? The more exclusive and dependent the relationship, the more likely the person is to be entitled to severance.
  • Control – Did the employer control the contractor’s work and hours? The more control the company has over the contractor, the more likely the company owes the contractor severance.
  • Tools and Expenses – Who owned them? Who paid to repair them? Was the contractor reimbursed for expenses? Contractors normally supply their own tools and are not reimbursed for personal expenses –expenses that are not passed through to a client. True independent contractors are not entitled to severance.
  • Profits and losses – If the contractor completed the job quickly, did she get the profit? If it took too long, did she take the loss? If the contractor had little opportunity for profit or loss, they are more likely to be seen to be working for the company and owed severance.
  • Workers – Could the contractor hire its own workers to get the job done? If not, the contractor is more likely to be seen to be working for the company and owed severance.
  • Contract – What does it say? Did it reflect the true reality of the situation? We have even seen “contractor” agreements that refer to the contractor as an “employee” throughout!

Whether you are a company or a contractor, it is important to have a contract that reflects the true intentions and the reality of the situation. If you don’t:

  • as a company you can be surprised with liabilities such as having to pay severance to “contractors” and sanctions for not complying with Employment Standards, tax and other legislation; and
  • as a “contractor” you can be out of work on little or no notice with potential claims that you have to fight about instead of something fair upfront.

Whether you need a contact, or are involved in a claim, a knowledgeable employment lawyer can help.

This blog is not intended to serve as legal advice, and only provides general information.

Every situation must be considered on its own facts. Need legal advice? Contact me [email protected].

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