The misclassification of employees has negative impacts on many levels—on the worker, the employer, and even the Canadian economy at large.
Unfortunately no one factor determines misclassification, which makes the complexities of your workers’ statuses even more difficult to manage. It could happen to anyone—not only businesses and staffing agencies that choose to do so on purpose to save on costs. Even innocent agencies that mistakenly classify an employee as an independent contractor will face the consequences of their error.
The Employment Standards Act has very strict guidelines about employee wages, such as minimum wage and overtime. Employers could face both massive criminal penalties and liability for the payment of back wages if found in violation of wage laws.
The Workplace Safety Insurance Board provides compensation coverage for employees who are hurt at work. If an employee is misclassified as an independent contractor, he wouldn’t be covered if he sustained a workplace injury. However, if misclassification was proven by the CRA, the staffing agency would be liable for unpaid premiums, occupational health and safety penalties, and perhaps even the full amount of the worker’s compensation.
As an employer, it’s your duty to keep your employees’ personal information secure. Legislation is in place to stipulate how this information must be guarded and how long it should be retained. By misclassifying, you could be breaching a privacy statute, which constitutes an offence and may expose you to suits for damages.
You are not required to renew a contract with an independent contractor. You can sever the relationship. But with an employee, there are laws in place stipulating why and how you can terminate employment. If an independent contractor you’ve terminated is later determined to in fact be an employee, you could be faced with a wrongful dismissal suit and damages for not having given notice of termination.
Vicarious Insurance and Liability
Staffing agencies can be seen vicariously liable for the tortious acts of their workers, but not, however, for those of their contractors. Insurance coverage may become an issue if employment statuses aren’t properly declared.
Employment Insurance and the Canada Pension Plan
Many staffing agencies purposely misclassify to get away with not paying their share of EI and CPP premiums. But once they’ve been found to have misclassified, they will have to pay the funds retroactively, along with interests and penalties, which can be significant.
Another way employers save from independent contractor misclassification is through the ability to exclude the workers from their benefits plans. If found guilty, however, they’d be forced to pay entitled employees what they are owed in terms of the company’s benefits plan, pension and retirement plan, health insurance, severance pay, paid leave, and more. In fact, this is a hot enforcement area that is subject to a number of lawsuits.
The Employment Standard Act offers strict guidelines for how employers are supposed to treat employees, but contractors are excluded from these regulations. Therefore, misclassification could lead to a failure to provide coverage under anti-discrimination laws for those improperly classified.
Payroll and tax laws are clear about how much money employers are supposed to withhold from their employees’ pay cheques every pay period. Failure to withhold federal and provincial payroll taxes and submit them to the CRA will lead to heavy fines and penalties, as well as the back payment of owed taxes.
You Can’t Afford to Risk the Consequences of Independent Contractor Misclassification
The bottom line is that the consequences associated with misclassification are serious and potentially devastating. It could have a monumental financial impact on your staffing agency. You can’t ignore worker classification risks. Take preventative measures to save yourself a great deal of stress, money, and negative exposure. Outsource your worker classification to a back office solutions provider to ensure that you don’t run into any of these consequences.