Independent Contractor/Consulting Agreements – Part 1 (Basics)

Jun 07

Independent Contractor/Consulting Agreements – Part 1 (Basics)

Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about independent contractor/consulting agreements, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers).

Independent Contractor/Consulting Agreements are used by Ontario clients where they do not want to create an employment relationship with the independent contractor. There are various reasons for this, such as:

The independent contractor/consultant ["IC"] has his or her own business.
The IC charges his or her own GST and remits it to the government.
The IC pays its own taxes and can deduct business expenses from his or her taxable income.
The IC owns his or her own tools and equipment.
The IC is not economically dependent on one particular client.
The IC has the ability to make more money by having more clients/customers.
The IC risks losing money by not being guaranteed a salary or wages.
The IC has control over obtaining, doing, and delivering the work.
The IC’s relationship with the party contracting for his or her services can be terminated according to the service agreement.

For the client, this means that they do not have to withhold and remit income tax source deductions or pay employment insurance or Canada Pension Plan premiums on behalf of the IC. These things will, no doubt be reflected in the independent contractor/consulting agreement (as will liability in case the opposite holds true).

If the IC is in actuality an employee in Ontario, then the following rules apply:

The employer is required to withhold and remit income tax payable by the employee.
The employer is required to withhold and remit employment insurance on the employee’s insurable earnings.
The employer is reuqired to withhold and remit the employee’s Canada Pension Plan contribution in respect of his or her pensionable employment earnings.
The employer is required to abide by the termination (notice or pay in lieu of notice) and severance provisions in the Ontario Employment Standards Act.
The employee will only be able to make certain limited deductions against their taxable income (e.g. travel, home office, etc.).

There are many, many more obligations imposed on the employer in various legal contexts which will be discussed in other blogs.

Given these things, IT IS VERY IMPORTANT that the client and the IC structure the realities of their relationship to be that of client and IC and NOT employer and employee (assuming that is the intention). That’s right: I wrote “structure”. Simply making the contract look more like an independent contractor/consulting agreement instead of an employment agreement won’t do it. If there is ever a dispute about the nature of the relationship, then tribunals, courts, and other triers of fact will look at the realities of the relationship – not just what’s written on paper.

In case you’re a Client and looking to engage the services of an Independent Contractor in Ontario, look no further:

Independent Contractor Agreement (Client) – No Schedules

This Agreement can be used by a Client who wants to engage the services of an Independent Contractor (e.g. a consultant, a professional, a general worker, etc.) without creating an employment relationship. The “Client” means that this Independent Contractor Agreement favours the Client – for example, through notice, termination, standards of care, and restrictive covenants, etc. The “No Schedules” means that there are no schedules in this particular Independent Contractor Agreement – although some have a Statement of Work or Description of Work, etc. This one does not. There will be different versions of this agreement which favour both the Client and the Independent Contractor and which may include Schedules. Schedules aren’t absolutely necessary. They’re just one way of having an agreement instead of writing things out in the actual agreement, you simply modify the Schedule. Here’s the sample Video Guide that comes with this Independent Contractor Agreement (Client) – No Schedules:

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