Tips on hiring associates: Independent contractor or employee?

There are several factors that should be weighed in deciding whether the relationship will be employer and employee, or principal and independent contractor. This decision may affect the employer’s liability for harm caused by the associate’s actions; the employer’s obligations regarding income tax law; as well as the employer’s responsibility for employment insurance payments, Canada Pension Plan contributions, and employment standards.

An employer can be held vicariously liable if an employee harms others in the course of his or her employment, while the relationship between an employer and an independent contractor typically does not give rise to this type of liability. An employer will need to perform certain tasks for employees that will not be required for independent contractors, such as: (1) collecting the employee’s social insurance number for the purposes of employment insurance and Canada Pension Plan; (2) having the employee complete a TD1 form for income tax purposes; (3) deducting income tax, employment insurance premiums, and Canada Pension Plan payments from an employee’s income and remitting these withholdings to various agencies on a regular basis.

In addition, employment standards legislation does not apply to independent contractors. By avoiding these issues, it may be possible to reduce fixed costs through the use of an independent contractor; however, the employer will be able to exert less control over how the independent contractor performs his or her duties. Finally, an employee would be expected to work only in the employer’s dental practice, while an independent contractor would be free to work for other dental practices as well.

If the status of the employment relationship is challenged by the Canada Revenue Agency, and the associate is found to be an employee rather than an independent contractor, as the parties intended, the employer could be liable for paying past income taxes, Canada Pension Plan contributions, or Employment Insurance premiums.

Therefore, when drafting an employment contract for the new associate, it is important to both state the intended relationship and ensure that the terms of employment are such that a court will find the intended relationship to exist. Courts will look to the substance of an employment contract, rather than simply the terms used by the parties, in determining the nature of the employment relationship.

In making their determination, Canadian courts will in all likelihood assess the overall relationship between the parties, while considering the following factors for guidance: the degree of control exerted by the practice over how the associate performs his or her job, ownership of tools and equipment utilized by the associate on a daily basis, and the associate’s risk of profit or loss based on performance.

In assessing employment relationships involving professionals, such as dentists and doctors, Canadian courts have typically held that the degree of control factor is less important to their decision than the other factors, as a professional would typically be allowed to make their own decisions regarding patient treatments regardless of their employment status.

In a future column, I will address termination and non-solicitation agreements, with specific focus on how addressing on these issues at the time of hiring improves outcomes for both the dentists and the associate.

This article is provided for educational and informational purposes only and does not constitute legal advice. For more information and advice, you should consult with an attorney.

Stuart J. Oberman, Esq., handles a wide range of legal issues for the dental profession including practice sales, real estate transactions, lease agreements, non-compete agreements and professional corporations.