IV. Self-Employment2017-03-03T18:36:57+00:00

A.    The Extent of Self-Employment

Until the 1970s, self-employment rates in Canada had been on a downturn due to decreased agricultural employment.[443] From that point, however, self-employment rose steadily for almost two decades reaching a peak of approximately 17% in 1998 before falling back to about 15% in 2002.[444] Levels remained relatively stable in the 2000s.[445] In 2009, self-employment constituted 16% of employment in Canada.[446] Ontario’s experience is reflective of Canada’s as a whole; self-employment has remained relatively stable over the past decade, with data suggesting that approximately 15% of the Ontario workforce was self-employed from 1999-2009.[447]

 

B.    Own-Account Self-Employment

The main area of vulnerability among the self-employed occurs among the own-account self-employed. Own-account self-employed people are those who “do not employ workers and who do not control the risks of the production process or accumulate capital.”[448] Unlike traditional self-employment, it more closely resembles employment than entrepreneurship.[449] In some cases, these workers may qualify as an employee under the Employment Standards Act. In other instances, workers may be self-employed but have only one client and be in a state of significant dependency upon that client, making them vulnerable to exploitation. Not all own-account self-employed workers are vulnerable, but own-account self-employment can be an indicator of precarity, particularly when coupled with low wages because it does not include the protections associated with employment (e.g., protection under the Employment Standards Act, 2000).

Canadian rates of own account self-employment grew dramatically between 1976 and 2000, from 4% to nearly 9% of total female employment and from 7% to 12% of total male employment.[450] In the 1990s, nearly 45% of new employment emerged in the form of own-account self-employment.[451] According to one research team, the “increase in own-account self-employment accounted for the entire increase in self-employment during the 1987–98 period”.[452] This is consistent with findings across industrialized nations where growth in self-employment in the 1980s and 1990s was concentrated in own-account self-employment.[453] Own-account self-employment also played a significant part in the more recent recessionary growth of self-employment.[454]

Own-account self-employed workers generally earn less than employees or employers.[455] This is exacerbated by the fact that self-employed workers are less likely to have benefits coverage.[456] Women and members of visible minorities are more likely to be found in own-account self-employment as compared to other forms of self-employment.[457] While the category of self-employed employers has a higher concentration of men and highly educated individuals, the own-account self-employed are more often women and workers with lower levels of education.[458] Part-time employment rates for the own-account self-employed are high, particularly among female workers.[459] Female own-account self-employed workers are often engaged in service jobs. In 2000, one third of female own-account self-employed workers were in the service industry.[460] Nineteen percent of immigrants, compared to 15% of Canadian-born workers, were engaged in self-employed work and more immigrants were likely to report that they had entered self-employment because of a lack of suitable paid jobs (33% of immigrants, compared to 20% of Canadian-born workers).[461]

Noack and Vosko found that approximately 15% of Ontario’s workforce are self-employed (5% of the Ontario workforce are self-employed employers and about 10% are own-account self-employed). The Ontario experience is similar to the Canadian experience as a whole in that Ontario women were less likely to be self-employed as compared to men; however, when they were self-employed, it was in own account self-employment, much of this work being in a low income category.[462]

 

C.    The Legal Framework

Self-employed workers are not covered under the ESA which requires the existence of an employment relationship where the worker and employer fall within the Act’s definition of “employee” and “employer”. For workers in precarious forms of work, classification as an employee is a condition of enjoying ESA protections and basic minimum standards. According to Parry and Ryan, the definitions of employee and employer have attracted more attention and controversy than any others under the ESA.[463]

“employee” includes

(a) a person, including an officer of a corporation, who performs work for an employer for wages,

(b) a person who supplies services to an employer for wages,

(c) a person who receives training from a person who is an employer, as set out in subsection (2), or

(d) a person who is a homeworker,

and includes a person who was an employee

“employer” includes:

(a) an owner, proprietor, manager, superintendent, overseer, receiver or trustee of an activity, business, work, trade, occupation, profession, project or undertaking who has control or direction of, or is directly or indirectly responsible for, the employment of a person in it, and(b) any persons treated as one employer under section 4, and includes a person who was an employer [464]                                                                                                              

As Ryan and Parry point out, the Ontario Labour Relations Board has indicated that distinguishing employee from independent contractor can be very difficult.[465] Because the definitions are broadly drafted, employment standards officers (ESOs) trying to distinguish between legitimate independent contractors and those who should be classified as employees must go beyond the text of the statute and apply common law tests.[466] However, a clear test for determining whether a worker is an employee or an independent contractor remains elusive. As Fudge, Tucker and Vosko report, “[s]ince the 1950s, prominent employment and labour scholars have concluded that the English common law did not have a unified conception of employment or a coherent method for distinguishing between employees and independent contractors.”[467] 

The ESA Policy and Interpretation Manual states that “it is the existence of the relationship between the employer and the employee that defines an employee for the purposes of the Act”.[468] The definition of the employment relationship in other statutes has not been found to be of great relevance to the determination under the ESA.[469] However, a number of approaches to making the determination have emerged within the common law. 

In a 2003 decision, 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., the Supreme Court of Canada explicitly rejected a single test approach.[470] It did, however, review the prevailing tests and present a non-exhaustive list of relevant criteria for making a determination as to whether a worker “engaged to perform…services is performing them as a person in business on his own account.”[471] These factors include:

  • Whether the worker has control over his or her own activities,
  • Whether the worker owns his or her own tools,
  • Whether the worker hires other workers to help, and,
  • Whether the worker has i) an opportunity for profit or ii) takes on either financial risk or “responsibility for investment and management held by the worker”.[472]

Sagaz reviewed the fourfold test set out in Montreal (City) v. Montreal Locomotive Works Ltd., [1946] 3 W.W.R. 748, [1947] 1 D.L.R. 161 (Canada P.C.): control, ownership of tools, chance of loss or profit and integration. Following the direction in Sagaz that there is no single definitive test, employment standards officers, adjudicators and courts must draw upon the factors in Sagaz, the fourfold test in Montreal and other tests that have emerged: the “organization test” that focuses on whether the worker was part and parcel of or integral to the organization, the “enterprise test” that examines the degree of control and risk taken by the employer and the “business practices test” that looks at the intention of the business arrangement between the parties.[473] Each test offers an approach to the central question: “is the person who has been engaged to perform services performing them as a person in business on his or her own account?”[474] 

 One issue that has arisen in the legislation is whether a “dependant contractor” is or could be included in the definition of employee under the ESA. “Dependant contractors” are not defined under the ESA but they are under the Labour Relations Act. The definition of employee under the Labour Relations Act includes dependent contractor.

 “Dependent contractor” means a person, whether or not employed under a contract of employment, and whether or not furnishing tools, vehicles, equipment, machinery, material, or any other thing owned by the dependent contractor, who performs work or services for another person for compensation or reward on such terms and conditions that the dependent contractor is in a position of economic dependence upon, and under an obligation to perform duties for, that person more closely resembling the relationship of an employee than that of an independent contractor.[475] 

In general, dependant contractors are workers with only one client, opening them up to extreme vulnerability. Whether this type of vulnerability can be remedied through legislation is an open question discussed later.

 

D.   The Key Issue: Misclassification

The primary concern arising out the LCO’s research and consultations, regarding self-employment, was that of misclassification. Some individuals are misclassified as own-account self-employed independent contractors when they would more properly be considered employees under the ESA. If a worker is misclassified (i.e., defined as self-employed when they should be defined as an employee) either deliberately or erroneously, the worker may not be aware that he or she is in an employment relationship and can access the protections of the ESA. This can have particularly harsh impacts on low income workers with disproportionately negative impacts on women and immigrants.  

Advocates have indicated that workers sometimes agree to be classified as self-employed by signing contracts or setting up paper corporations at the request of the employer simply in order to secure some form of income. In other cases, workers erroneously believe that they are self-employed simply because of an assertion made by the employer.[476] However, these are not the governing factors in determining whether an employment relationship exists. Some advocates are concerned with what is referred to as “creative classification” by employers. Practices of misclassification have been identified in industries such as cleaning and trucking. In our consultations, we heard about examples of some pizza delivery persons and workers in the catering industry being misclassified as independent contractors to enable employers to avoid employment standards obligations.[477]  

Employers indicated that contracting out may be seen as a necessity for companies to compete in the global market in areas such as manufacturing. Workers’ advocates, however, do not accept globalization as the primary cause. 

Employers argue that these strategies are necessary because of global economic integration. While it may be that some local manufacturers struggle to drive down their costs in order to compete against firms located elsewhere, globalization does not explain new employer practices in Ontario. Many employers and industries engaged in outsourcing, indirect hiring, and misclassifying workers that have been documented by the WAC [Workers Action Centre] are in sectors that have a distinctly local market – restaurants, janitorial services, business services, construction, trucking, and home health care, warehousing, packaging and manufacturing of locally consumed goods.[478] 

When considering options for reform, it is important to understand the distinction between misclassification and business choices that companies are making to increase their competitiveness, such as outsourcing and using temporary agency workers. Misclassification, whether it is deliberate or inadvertent, is covered by existing legislation and therefore efforts to address it must be enforcement driven. Legitimate business choices that result in labour insecurity require other types of responses such as supply chain regulation and perhaps strengthened legislative protection as discussed previously in this Chapter and in the next Chapter dealing with the OHSA.

 

E.     Possibilities for Reform 

Some writers have proposed harmonization of the definition of “employee” or “worker” across relevant legal regimes, to provide conformity of the Employment Standards Act definition with those established in other contexts, such as under federal income tax law. Alternatively, it has been suggested that employment statutes “could be revised to include provisions allowing for determinations on the definition of employee in one context to be made applicable in other contexts.”[479]

Another line of thinking suggests that definitional reform is insufficient. Fudge, Tucker and Vosko suggest abolishing the distinction between employees and independent contractors and extending protection to all workers, not only in the employment standards context, but also with respect to collective bargaining and income tax law, maintaining at least that “[t]he starting-point should be that all workers dependent on the sale of their capacity to work be covered, unless there are compelling public policy reasons for a narrower definition.”[480] Rather than relying on an expanded or broadened definition of employee as the basis for protection, Fudge, Tucker and Vosko suggest protection as a default, regardless of how one labels the sale of labour. On a similar note, the Wellesley Institute argues for extended ESA coverage without regard to classification. Arguing on the basis of equality and human rights legislation, it suggests 

[t]here should be no difference in pay or working conditions for workers doing the same work but which is classified differently, such as part-time, contract, temporary, or self-employed. 

The ESA has a role in establishing a framework for equality among workers doing comparable work. The government should not enable employers to impose inferior conditions on workers (who end up being primarily women, racialized workers, immigrant workers and young workers) simply because of the form of employment or employment status. This measure would help bring the ESA in line with the Human Rights Code.[481]

While the LCO supports the general view that workers, such as those in part-time positions, should be paid the same as their counterparts in full-time positions for equivalent work, self-employed persons are in a different category. Suggestions that any distinction between the self-employed and the employed be collapsed in all regulation would have far-reaching consequences and would potentially have negative impacts for self-employed persons. In any event, it would require broad policy considerations at both the provincial and federal level that are beyond the scope of this Project. 

It is difficult to understand the justification for regulating the work of those who are legitimately self-employed. Furthermore, we are of the view that implementation of such a policy would have feasibility challenges. For example, should self-employed individuals be required to limit themselves to a certain number of hours per week or be required to pay themselves a certain wage? Such regulation would not only be unenforceable but also undesirable. Futhermore, how would the responsibility for a two-week vacation be divided among an independent contractor’s multiple clients? 

In our view, the real issue is how to identify and remedy the situation of workers erroneously misclassified as self-employed when an employment relationship actually exists. A secondary issue is whether additional protections should be put in place to protect self-employed workers in dependant working relationships (i.e., low-wage workers with only one client), while allowing for other self-employed persons to benefit from flexibility and choice in self-determination of working conditions.  

In the LCO’s view, the most straightforward approach would be to target the actual issue, the practice of misclassifying employees, through improved enforcement procedures, policy development, ESO training and public awareness. This would protect the most vulnerable without negatively impacting those who benefit from self-employment. The advantages of compliance and enforcement practices such as proactive inspections and expanded investigations outlined earlier are equally applicable to the situation of identifying cases of misclassification. The most effective enforcement activities would be those directed at industries known to be at high-risk for practices of misclassification such as trucking, cleaning and catering, as well as identification and proactive monitoring of industries populated by workers known to be disproportionately affected.  

Our consultations revealed a sense that those who work with vulnerable workers were not confident that Ministry of Labour determinations on classification of employee versus self-employed were consistently made appropriately. In the ESA Policy and Interpretation Manual, ESOs are provided with information about the various legal tests. However, no substantive policy direction is provided.[482] Policy direction on an approach to the determination based on the common law tests may be a way to provide more transparency and confidence among stakeholders in the decision-making process. We have discussed the merits of public awareness campaigns earlier in this Interim Report. In our view, highlighting the practice of misclassification and educating on the appropriate definition of employee and self-employment through public awareness posters, ads and information sessions targeted at the general public and at high-risk industries would increase the likelihood of compliance and build a foundation for improved enforcement. 

Consideration should be given to the possibility that there is systemic misclassification. In other words, it may be that entire classes of workers are being incorrectly identified as independent contractors. Once these classes or types of workers are identified, rather than requiring each worker to bring his or her case to the Ministry of Labour as an individual complaint, proactive blitz-type enforcement activities would have the added potential of uncovering this type of systemic misclassification. Such processes could pave the way for specific policy development and employer education. 

A clear test for defining employment codified within the ESA is another way that the Province could make an emphatic statement about the issue and, at the same time, provide guidance for employers, employees and decision-makers. It may be challenging, however, to create a definition specific enough to provide a test that is useful yet flexible enough to keep pace with the metamorphic nature of employment. We caution against implementing improved consistency at the expense of some degree of flexibility. Rigid consistency does not always produce the desired results. In our view, policy and law must operate by balancing flexibility and consistency. The government and courts must have a clear policy and legal framework, but they must also be given adequate discretion to respond to the wide-range of individual circumstances presented to them.

Beyond considerations of consistency, extending protection to workers in relationships of dependency (i.e., low-wage contractors with one client) presents unique challenges. For example, a state of dependency may be fluid in that some such workers may be dependant upon one client at one point in time and have several clients at another time. Consideration of a definition of “employee” that extends itself to include such workers would need to balance the needs of independent and/or high wage self-employed persons who benefit from flexibility and control over their working arrangements. Appropriate drafting could leave room for the recognition of new and emerging forms of employment and a broad range of individual situations. Recognizing that such changes cannot anticipate all impacts, any such policy and legislation should be evaluated after a reasonable period of time to determine effectiveness and whether adjustments are required.

The Law Commission of Ontario recommends that:

 

31. The Ministry of Labour act to reduce misclassification of employees as self-employed by

a) engaging in proactive compliance and enforcement processes directed at industries with known high incidences of misclassification;

b) increasing transparency in decision-making through policy guidance and training for employment standards officers on the definition of employee and the common law tests; and

c) launching a public education campaign to raise awareness of the issue of misclassification of employees under the Employment Standards Act.

 

32. The Ontario government consider extending some ESA protections to highly vulnerable low wage self-employed persons in dependent working relationships with one client and/or identifying other options for responding to their need for employment standards protection.

At Recommendation 9, we recommend that the Ministry of Labour enact a requirement that employers provide all workers with written notice of their employment status and terms of their employment contract at the outset of the working relationship. We believe this step would have particular benefits for workers misclassified as self-employed. It would create a situation requiring all parties to turn their minds to the issue of the employment relationship. Some concerns were raised about the possibility that requiring a written contract could increase the risk of deliberate or erroneous misclassification of employees as self-employed.[483] As we have noted, sometimes simply a written assertion that a worker is self-employed is accepted as sufficient when, in law, it is not the case. However, if forms developed by the Ministry of Labour for this purpose set out the appropriate definition of employee versus self-employed, the forms themselves could provide guidance and education on proper definitions. Inclusion of Ministry contact information would encourage individuals to seek clarification from the Ministry on grey areas. The forms themselves and the requirement to complete them would have the effect of improving knowledge and voluntary compliance. It would also benefit decision-makers later should a dispute arise. Coupled with an effective public education campaign, this simple low-cost step would be a valuable strategy for confronting the issue of misclassification.

The Law Commission of Ontario recommends that:

 

33. a) The Ontario government amend the ESA to require employers and contractors to provide all workers, including independent contractors, with written notice of their work or employment status and terms of their employment or work contract; and

b) The Ministry of Labour develop standard forms to support employers and contractors in this task.

 

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