Why Misclassifying Foreign Workers as Independent Contractors Can Create Legal Problems

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Employers often hire independent contractors to provide specialist skills, fill staffing needs or address temporary requirements. When an employer hires a foreign worker they get into a number of potential risks by incorrect classification. Classifying a foreign employee as an independent contractor means the employer is liable for employment standards and immigration non-compliance. This classification can affect a business’s and worker’s tax liabilities. A business who classifies its employees incorrectly can suffer greatly in their employment and immigration compliance.

Worker Classification Requirements

The designation of worker category, be it employee or independent contractor, is based on the actual working relationship between the business and the worker. A contract describing the worker as an independent contractor will not necessarily override the elements of the working relationship which may suggest employment. Where a foreign worker has been granted work authorization on specific terms these factors may be used to assess whether the conditions of employment comply with the terms of the worker’s authorization to work in Canada.

Employment Standards Consequences

A misclassified worker may result in employment standards obligations for their unpaid entitlements. Depending upon the type of relationship, a misclassified employee can be owed minimum wage, vacation and public holidays, overtime, termination and notice of employment standards obligations. Similarly, a contractor who is found to actually be an employee could incur employment standards obligations.

Where a misclassification dispute occurs, the business may face employment standards proceedings. In addition to any unpaid employment standards to which the employee is entitled, businesses may have to pay additional administrative penalties to resolve employment standards issues.

Tax and Financial Risks

Misclassifying a worker can also trigger tax liabilities. Businesses which classify employees as independent contractors can be responsible for remitting any taxes which should have been withheld from the employee’s wages. Contractors can also be misclassified in terms of the benefits to which they are entitled.

In addition to employment standards liabilities, businesses which misclassify employees are also at risk of facing significant overpayment demands.

Immigration Compliance Concerns

Where a foreign national’s work authorization contains conditions regarding their working conditions and location of employment, a misclassified working arrangement can give rise to immigration compliance risks. A business which relies exclusively on a contract to describe the nature of its relationship with a foreign worker cannot ignore the immigration requirements for that worker.

Where the terms of employment are ambiguous, seeking a Toronto immigration lawyer for advice can help to identify whether a prospective employment relationship will carry immigration compliance implications.

Business Compliance Responsibilities

Businesses which are uncertain as to how to classify a particular type of working relationship should seek to obtain the necessary advice to ensure that the working relationship is compliant with employment standards and immigration rules.

An agreement between an organization and independent contractors has benefits in terms of tax advantages. However, misclassifying an employee as self-employed or independent contractor bears tremendous compliance risks. Before determining a worker is an independent contractor and not an employee, employers need to establish the type of work relationship. Classifying a foreign worker as an independent contractor that there is significant risk to the business should be avoided by seeking legal and tax guidance.

Conclusion

Classifying a foreign national as an independent contractor can result in a number of different employment, tax and immigration compliance risks. Trying to reduce employment costs by using independent contractors when an employee is required is risky from an employment standards and immigration perspective. Businesses that want to make sure they are compliant with employment standards and immigration requirements when they hire foreign workers should make sure that they know the elements of the working relationship that could trigger employment obligations. Getting the right legal, tax and immigration advice will let employers understand their obligations and make sure that they're compliant.