Most workers are either employees or independent contractors. The distinction is a perplexing one for both organizations and workers alike. However, it is very important. There are a whole host of common law and statutory rights, obligations, and remedies which apply to the employer/employee relationship, but generally do not apply to independent contractors.

The parties' own definition of their relationship is not the deciding factor; for example, by calling someone an "employee" or calling an agreement an "employment agreement" does not make someone an "employee" at law. A court will look beyond the way the parties have described themselves and assess the true nature of the arrangement based on the parties' conduct.

The courts will look at a number of factors to determine whether an individual is an employee or an independent contractor. One of the key factors is the amount of control exercised by the organization. The more control an organization has over a worker, the more likely the worker is an employee rather than an independent contractor. For example, an employer/employee relationship is indicated where the organization directs the worker concerning things such as: what work is to be performed; when it will be performed; where it will be performed; and the means to be used to perform it. Another indication is whether the organization has the right to suspend or dismiss the worker.

Factors that indicate an independent contractor relationship include where the worker has control over the project, owns the tools, and has some chance of profit and/or risk of loss in the endeavour.

Most nurses working in a hospital are employees of the hospital. Most physicians working in a hospital who operate a private practice are independent contractors and not employees of the hospital. Usually medical technicians are employees of hospitals or medical clinics. Whereas physiotherapists are sometimes employees and sometimes independent contractors. It all depends on the actual relationship, not on what the workers are called, what they think they ought to be treated as, or how they designate themselves in their income tax returns.

Under the common law, employees are entitled to reasonable notice of termination or pay in lieu thereof. Conversely, there is generally no requirement to give notice of termination to independent contractors. Employers may be vicariously liable for the actions of employees, but not those of independent contractors.

In addition to provincial and federal employment standards legislation, there is a significant amount of legislation that governs employment relationships in Canada that does not apply to independent contractors.

Where an employer/employee relationship exists, among other things, the employer must do the following:

• provide overtime pay, vacation, public holiday pay, pregnancy and parental leave;
• withhold income tax, Canada Pension Plan or Quebec Pension Plan contributions and Employment Insurance premiums on amounts paid to employees;
• remit these amounts, as well as the employer's share of contributions and premiums, to Canada Customs and Revenue Agency;
• report the employees' income and deductions on the appropriate information return; and
• register with relevant provincial organizations, such as the Ontario Workplace Safety and Insurance Board

The characterization of the relationship is also significant for the worker, as the ability to deduct expenses for income tax purposes is much more restricted for employees than independent contractors.

The courts have held that there is also an "intermediate class" of workers. This intermediate category will usually be found to exist where the relationship is not clearly that of employer/employee or independent contractor, where elements of both relationships exist, or where the relationship is "akin to an employment one". In such cases, even though a worker may not be considered an employee, the courts have held that he or she is entitled to reasonable notice of termination.

For example, the courts have found that independent contractors were entitled to reasonable notice of termination in the following situations: the working relationship lasted for a very long period of time; work was performed on the organization's premises; the workers were identified as staff members on the organization's promotional material; the workers devoted all or most of their time to the organization's affairs; and where relatively high levels of control, subordination or economic dependency were present.

In the 2003 case of Aqwa v. Centennial Home Renovations Ltd., the Ontario Court of Appeal confirmed the importance of written agreements and held that the independent contractor was not entitled to reasonable notice of termination. In this case, there was a written agreement between the company and Aqwa which stipulated that Aqwa was an independent agent, and that "either party may terminate this agreement at any time without notice or penalty".

The company trained Aqwa regarding its product line and listed him as a branch manager in its sales materials. Aqwa's sales were subject to approval by the company. Aqwa treated himself as an independent contractor for tax purposes. The company terminated Aqwa without notice.

Aqwa argued that there was an employment relationship, or an "employment-like" relationship entitling him to reasonable notice. The Court of Appeal found that the termination provision was enforceable as there was no evidence that Aqwa signed the contract under pressure or duress.

If the parties intend to create a true independent contractor relationship, with no obligation to give notice of the termination, this should be clearly stated in a written agreement. It should be explicitly stated that the relationship may be terminated by either party without notice or compensation in lieu thereof.

Provided that there is no evidence of inequality of bargaining power or vulnerability on the part of the worker, and no evidence of unconscionability at the time the agreement was executed, courts will be inclined to enforce a restrictive notice provision in an independent contractor agreement.

An independent contractor agreement should be of a fixed duration or subject to renewal. Organizations should ensure that the agreement is reviewed at the end of the term, instead of allowing for an automatic renewal. This will affirm the fact that the worker is subject to the agreement and is not an employee.

All organizations and workers, especially those in the health care professions, should examine the relationship between the organization and its workers and ensure that it is clear whether the worker is an employee or an independent contractor.