Are Independent Contractors Entitled to Severance Pay?

Employees dismissed without cause are usually entitled to severance. But not all fee-for-service workers are employees. For instance, you may visit the same barber every month, but everyone intrinsically understands that your hairdresser is not your employee. On the other hand, many workers who are treated as independent contractors seem almost indistinguishable from employees, like gym employees, drivers, and delivery people.

This leaves many of these so-called “independent contractors” wondering what their entitlements are upon termination. Many may be surprised to learn that those termination entitlements can be significant.

Distinguishing employees from independent contractors (for the purposes of severance)

Distinguishing between employees (who are entitled to severance) and independent contractors (who are not) is far from straightforward. The way you and your employer have chosen to define the relationship is close to irrelevant. Rather, the way the law distinguishes between the two is something like the so-called “Duck test”: If it looks like a duck, swims like a duck, and quacks like a duck, then it is probably a duck.

That is, the following factors could lead a judge to conclude that an independent contractor is in fact an employee, and thus entitled to severance:

  • Control: The employer has control over when, where, and how the work is done.
  • Tools: The employer owns the tools, materials, and equipment used to perform the work;
  • Risk of Losses/Chance of Profits: The employer benefits from the chance of profit, and bears the risks of financial loss;
  • Integration: The services provided are integral to the employer’s operation, such that you would appear, to an outsider, to be an employee.

Most cases are close calls, involving factors in favour of both competing conclusions.

The Intermediate Category – Dependent Contractors

Employment law tends to err on the side of protecting workers’ rights in the event of conflicts with employers. For this reason, the law has developed to recognize a third intermediate category of workers known as dependent contractors. Dependent contractors are not employees, but they are entitled to severance upon termination of employment.

Confusingly, many of the factors that distinguish employees from independent contractors also distinguish independent from dependent contractors. One telling difference between independent and dependent contractors, however, is the contractor’s degree of exclusivity. Contractors who are financially dependent on one single or primary “client” are more likely to be entitled to severance.

Advantages and disadvantages of employee versus contractor relationships

Both relationships have other benefits and drawbacks, aside from termination entitlements, including the following:

  • Autonomy: Contractors tend to have more freedom to determine when, where and how to perform work.
  • Tax withholdings: Contractors pay their own income taxes, meaning that they are paid for their work without deduction. Contractors may need to charge sales tax, depending on the amount they’re paid.
  • Employment Insurance/CPP/WSIB: Contractors do not remit to EI or CPP, but by the same token, may be ineligible to make claims under these programs.
  • Employment Standards: Employees are entitled to a wide range of employment standards minimums, including minimum wage, vacation and holiday pay, overtime, protected leaves of absences, and much more. Contractors do not benefit from these protections.

What to do if you have been misclassified as an independent contractor

This depends on your goals. You may challenge your status by bringing legal proceedings, for instance, by suing in civil court for common law severance. Talk to an employment lawyer about your rights and options.

If you have been terminated, laid-off, or severed from your job contact the employment lawyers at Share Lawyers. Our experienced team of Employment Law lawyers can help. We offer free consultations and there are no fees unless we win your case. Find out if you have an Employment Case!

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