(Some) Certainty & Savings: What Ontario Businesses Gain With the New “Consultant” Exemption in the ESA
The Employment Standards Act, 2000 is a confusing piece of legislation, even for employment lawyers. Did you know that the ESA does not have a clear definition of “employee”[i]? (It’s weird, I know.)
By extension, the ESA has been an unhelpful resource for businesses trying to determine who is not an employee but, rather, a contractor in business for themselves. Until now. A recent change to the ESA provides Ontario businesses with a clear checklist for how to identify certain types of consultants as non-employees.
There are big (though not unlimited) benefits to businesses if these consultants are not entitled to ESA protection.
So what’s the big deal about the new “consultant” exemption?
Certainty
For many Ontario businesses, the employee-vs.-contractor confusion meant that they could never be certain about whether a particular worker might be considered an employee under the ESA. These businesses would take different approaches to shoehorn workers into the “contractor” category – e.g.:
Lipstick on a pig: Call them a “consultant” even though they work full-time hours at the office, use company equipment, and have benefit coverage.
Flat fee fix: Pay them a flat monthly fee without deductions and hope that as long as they’re off the regular payroll, it means they’re not “employed”.
The above examples demonstrate the futility of some businesses’ attempts to separate a consultant from their “true” employees. But since employment-related claims are largely complaint driven, many businesses got away with questionable labels given to consultants.
The new ESA section, enacted on January 1, 2023, identifies parameters that, if met, put certain “consultants” clearly into the “contractor not employee” box.
Savings
True “employees” are entitled to certain ESA protections and entitlements, which are more costly to a business than those provided to a consultant. For example:
Payments: Vacation pay, holiday pay, overtime pay, minimum wages, termination pay, and (if applicable) severance pay
Protections: Hours of work, reprisal, leaves of absence, and Ministry of Labour oversight
Perks: Benefit coverage, expense reimbursement and paid sick days
In addition, the business is required to make certain remittances on behalf of an employee, which are, indirectly, for the employee’s benefit – e.g. Employer Health Tax and EI and CPP remittances.
In most cases, it is cheaper to engage a consultant than to hire an employee, but only if there is little to no risk that they may claim (or the government or a tribunal may deem) that they are really an employee.
Criteria to meet the new ESA “consultant” exception
Ontario consultants that meet each of the following, new criteria are not entitled to protection under the ESA:
1. They perform one of the two following types of work:
“business consultant” means an individual who provides advice or services to a business or organization in respect of its performance, including advice or services in respect of the operations, profitability, management, structure, processes, finances, accounting, procurements, human resources, environmental impacts, marketing, risk management, compliance or strategy of the business or organization OR
“information technology consultant” means an individual who provides advice or services to a business or organization in respect of its information technology systems, including advice about or services in respect of planning, designing, analyzing, documenting, configuring, developing, testing and installing the business’s or organization’s information technology systems
2. The consultant is providing services through either a corporation (in which they are either a director or shareholder with an applicable shareholders’ agreement) or a registered sole proprietorship
3. There is a services agreement confirming:
Timing of payment; and
Amount of payment (which must be based on an hourly rate (excluding other compensation) of at least $60.00)
4. The business must pay the consultant as agreed
5. Other prescribed requirements (and none have been proclaimed yet)
In short, regardless of any other factors, a business not required to provide a “consultant” (as defined above) with the regular employee-related payments and protections set out in the ESA.
Remaining risks and considerations when hiring a consultant
Ensuring that a consultant meets the above 5 criteria does not absolve the business of all worries about the consulting relationship. A few of the ongoing risks include:
The Tax Man: This “exemption” only applies for the purposes of the ESA. Other agencies, particularly the CRA, could still audit or review the relationship to determine if the consultant is really an employee in disguise and make a different determination than under the ESA.
Changing Conditions: Just because a consultant is currently exempt from ESA protection now does not mean that they will remain exempt. The assessment of the 5 criteria is not a one-time assessment. For example, if the scope of the engagement changes from operations to sales or the business does not pay the consultant as agreed, then the consultant ceases to meet all of the required conditions and may be entitled to ESA protection (or at least will no longer be automatically exempt).
Legacy Obligations: Unlike other ESA changes, which identify a transition period for claims arising before the change was implemented, this new section does not say what happens to claims that arose before January 1, 2023. It is not appropriate for a business to assume that all historic obligations are wiped out as of the new year.
Always Get the Insurance: Businesses should still take steps to ensure that third parties also treat the consultant as a contractor. For example, obtain a WSIB certificate confirming the consultant’s status as a contractor (not employee) and arrange for other general liability insurance that covers the relationship with the consultant.
This legislative update is a welcome one for businesses that engage consultants regularly. While the update does not eliminate the employee-vs.-contractor grey zone in all respects, it gives some certainty to Ontario businesses about the bargains they make with consultants from an ESA perspective.
***
[i] The ESA lists certain categories of people who are included in the definition of an employee, but that list is not exhaustive. It then cites many exemptions, without a consistent set of rules. Then there is a separate section that excludes certain types of work or workers from the application of the ESA, even if they would otherwise fit the definition of “employee”.
