Can an independent contractor receive Employment Insurance ("EI", formerly "UI") benefits when he is fired from his position?
While the answer should be no, the real answer -like everything in law- is "it depends."
Understanding Independent Contractors
The answer to the question, "can an independent contractor receive EI benefits when he is fired from his position?" should be "no" because if the worker was truly an independent contractor, then he would not have paid into the employment insurance regime. Most "independent contractors" do not, in fact, pay EI premiums, nor do they typically make contributions to the Canada Pension Plan ("CPP").
Whether a worker is an independent contractor or an employee is a complex question that can only be answered on a full understanding of the facts. Readers looking to answer that question will find no clear answer on the internet, only a series of "tests" and questions that have to be answered. (For CRA's approach, have a look here: RC4110 Employee or Self-Employed?)
Ability to Apply for Determination of Employment Status
Surprising to some employers, workers have the legal right to apply to the Canada Revenue Agency ("CRA") for a determination of their status, pretty much at any time. Typically workers do not apply such a determination until after the employment relationship has ended. However, the request can be made at any time by an employee, subject only to the limitation that a request must be made "before the June 30 following the year to which the question(s) relate."
The right to do so is set out in section 90(1) of the Employment Insurance Act, which provides as follows:
An employer, an employee, a person claiming to be an employer or an employee… may request an officer of the Canada Revenue Agency… to make a ruling on any of the following questions:
(a) whether an employment is insurable;
(b) how long an insurable employment lasts, including the dates on which it begins and ends;
(c) what is the amount of any insurable earnings;
(d) how many hours an insured person has had in insurable employment;
(e) whether a premium is payable;
(f) what is the amount of a premium payable;
(g) who is the employer of an insured person;
(h) whether employers are associated employers; and
(i) what amount shall be refunded under sections 96(4) to 96(10)
Section 26.1 of the Canada Pension Plan has similar provisions with respect to CPP contributions. This post will focus on EI benefits only.
Implications of a Finding that the Worker was an “Employee”
A finding by CRA that the worker was actually an "employee" and not an independent contractor, and thus is eligible for EI benefits, can be a relief for someone who finds himself suddenly unemployed but it can also be disastrous for the employer.
Section 82(1) of the Employment Insurance Act provides that:
Every employer paying remuneration to a person they employ in insurable employment shall
(a) deduct the prescribed amount from the remuneration as or on account of the employee’s premium payable by that insured person under section 67 for any period for which the remuneration is paid; and
(b) remit the amount, together with the employer’s premium payable by the employer under section 68 for that period, to the Receiver General at the prescribed time and in the prescribed manner.
Subsections (4), (8), and (9) of section 82 provide that:
(4) … an employer who fails to deduct and remit an amount from the remuneration of an insured person as and when required under subsection (1) is liable to pay to Her Majesty the whole amount that should have been deducted and remitted from the time it should have been deducted.
(8) If an employer has failed to remit to the Receiver General an amount that the employer was required to remit at the time when it was required, the employer shall pay to the Receiver General interest on that amount at the prescribed rate computed from the day on which the employer was so required to remit the amount to the day of remittance of the amount to the Receiver General.
(9) Every employer who in a year fails to remit to the Receiver General an amount that the employer is required to remit at the time when it is required is liable to a penalty of
(a) subject to paragraph (b), if
(i) the Receiver General receives that amount on or before the day it was due, but that amount is not paid in the manner required, 3% of that amount,
(ii) the Receiver General receives that amount
(A) no more than three days after it was due, 3% of that amount,
(B) more than three days and no more than five days after it was due, 5% of that amount, or
(C) more than five days and no more than seven days after it was due, 7% of that amount, or
(iii) that amount is not paid or remitted on or before the seventh day after it was due, 10% of that amount; or
(b) 20% of the amount if at the time of the failure a penalty under this subsection was payable by the employer for an amount that the employer was required to remit during the year and the failure was made knowingly or under circumstances amounting to gross negligence.
Section 83 of the Employment Insurance Act makes the directors of the corporation at the time when the failure occurred jointly and severally, or solidarily, liable, together with the corporation, to pay Her Majesty that amount and any related interest or penalties.
The current prescribed interest rate for unremitted income tax, EI and CPP contributions is 5%, compounded daily. Interest is also applied to penalties.
The implications under the Canada Pension Plan and the Income Tax Act are equally serious. The provisions read similar to those of the Employment Insurance Act, and are set out in section 21 of the CPP. Director’s liability is set out in section 21.1 of the CPP.
For those readers looking for more information on “penalties, interest, and other consequences” that information available from CRA on their website at: this link.
The Right to Get the Money Back from the Employee
As is set out above, subsection 82(8) makes the employer responsible for "an amount that the employer was required to remit at the time when it was required." That is to say, the employer can be held responsible for both the employer's portion of the premiums and the employee's portion.
Some employers may wish to shift the risk of such a negative finding being made onto ‘independent contractors’ by including in their contract a provision that says that, if a finding is made by CRA that the worker is deemed to be an employee, then the independent contractor will reimburse the employer for any amount the CRA orders the employer to pay. However, section 84 of the Employment Insurance Act makes those provisions illegal. Section 84 provides that:
Despite any contract to the contrary, an employer is not entitled to recover from an insured person the employer’s premium payable by the employer either by withholding the amount of the premium from the person’s wages or otherwise.
What that means is that, at no time, can an employee be made to pay the employer's portion of the EI premium. Any such agreement is illegal and unenforceable. Employees and employers looking for an opinion on their own agreement would be wise to seek a professional legal opinion on this issue.
The Right to Appeal
Employers and employees unhappy with the ruling made by CRA have the legal right to appeal any such finding, provided that they take the appeal within 90 days of being notified of the ruling. (EI Act, s. 91)
Section 103 of the Employment Insurance Act affords a person affected by a decision on an appeal the right to appeal from that decision to the Tax Court of Canada in accordance with the Tax Court of Canada Act within 90 days after the decision is communicated to the person.
Again, similar provisions exist in both the CPP and Income Tax Act.
Takeaways for Employees with Labour Pains
For those working in Ontario as "independent contractors" who find themselves suddenly unemployed the takeaway should be that you do not have to accept the situation in which you find yourself. You may be eligible for EI. You may be entitled to notice of your dismissal (in fact, even if you are found to be an "independent contractor" you can still be entitled to notice of the termination of the contract.)
If you are looking for assistance with those questions and you are in Ontario, the professional, experienced, and cost-effective employment lawyers at Ottawa's Kelly Santini LLP would be happy to be of service to you.
Takeaways for Employers with Labour Pains
The first takeaway for employers with labour pains is that substance will prevail over form; notwithstanding calling some workers "independent contractors" they likely are "employees." Before taking on new workers it may be prudent to seek a professional legal opinion on whether the worker is actually an independent contractor. Employers may also wish to have their contracting agreements professionally drawn up so as to protect their interests.
The second takeaway is that if a worker does file a request for a determination of status, the outcome is not as sure as you may think. Given the potential for stiff penalties, it may be prudent and cost-effective to seek the advice and services of a professional employment lawyer. The professional, experienced and cost-effective employment lawyers at Ottawa's Kelly Santini LLP would be happy to be of service to your business.
To reach the author of this blog, Sean Bawden, email firstname.lastname@example.org or call 613.238.6321 x260.--
As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.
Sean P. Bawden is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Kelly Santini LLP. He is also a part-time professor at Algonquin College teaching Trial Advocacy for Paralegals and Small Claims Court Practice.