In Azur Human Resources Ltd. v. The Minister of Revenue, the Ontario Superior Court considered how workers affiliated with temporary placement agencies ought to be classified, not for the purposes of labour and employment legislation, but for tax purposes under the Employer Health Tax Act (the “EHTA”).

What is Employer Health Tax?

The Employer Health Tax (the “Tax”) is a payroll tax based on income paid to employees and former employees, the proceeds of which help fund the Ontario healthcare system. The EHTA defines “employer” as “a person or government, including the government of a province, a territory or Canada, who pays remuneration to an employee.” It defines “employee” as one of the following:

  • An individual employed by the employer;
  • An individual who holds an office from an employer and receives remuneration in respect of the performance of the duties of the office; or
  • An individual who was formerly an employee within the meaning of the above definitions.

In What Circumstances Must Employers Pay the Tax?

Employers are required to pay the Tax if they meet the following criteria:

  • They have employees who physically report for work at their permanent establishment in Ontario; or
  • They have employees that are attached to their physical establishment in Ontario; or
  • They have employees who did not report to work at any of their permanent establishments but who are paid from or through the employer’s permanent establishment in Ontario; and
  • They have an Ontario payroll in excess of $490,000.

The Azur Case

The appellant companies, Azur Human Resources Ltd. and Dare Human Resources Corporation, placed temporary workers in positions at the federal government. Following a series of assessments by the Ontario Minister of Revenue that held the companies owed the Tax, they appealed to the Ontario Superior Court.

The appellant companies argued the federal government was the proper employer of the relevant workers and therefore they were not liable to pay the Tax.

The Court ultimately found that the appellants were employers of the workers for the purposes of the EHTA, and therefore liable to pay the Tax.

At the outset of its analysis, the Court noted that the workers could not be classified as self-employed independent contractors, given their lack of autonomy, and therefore some entity must be their employer – i.e. either Azur, Dare or the federal government.

With reference to Pointe-Claire (City) v. Quebec (Labour Court)and IBM Canada Ltd. v. Ontario (Minister of Finance), the Court determined that, for the purposes of the EHTA, it was necessary to undertake a comprehensive review of the working relationship and the contractual and statutory framework to determine whether an employer/employee relationship exists.

The EHTA specifies that the employer is a party that pays remuneration to an employee. In the matter at hand, the appellants were the only parties contractually obligated to pay the workers for services provided. (Azur and Dare invoiced the federal government for services, and then paid the workers directly from the proceeds.)  Therefore, under the EHTA, the appellants were the only parties who could be the employers. While the federal government had some characteristics of an employer, such as controlling all aspects of the workplace and the work product, the appellants controlled and administered recruitment and staffing, and negotiated remuneration and administration of the payroll.  

Importantly, the Court determined that it was possible to conclude “that a placement agency was an employer for taxation purposes, but not necessarily for labour relations purposes.”

PH Takeaways

  • The impact of the employee/contractor/working distinction goes beyond just income tax – Beyond tax considerations, if individuals in the workplace are classified as employees, there are several corresponding obligations that employers have under the applicable provincial employment standards legislation. These obligations include minimum wage, limits on hours of work, overtime and vacation pay.
  • Assumptions about a worker’s status can be costly – If an employer incorrectly assumes that their workers are not employees and this error is later discovered, the employer may find itself owing substantial outstanding payments to the employees, or the provincial or federal government. For example, a class action lawsuit was brought against the accounting firm KPMG for unpaid overtime from 2000 – 2007, resulting from the misclassification of employees. KPMG and the employees settled, for a grand total of $10 million.
  • The classification of workers as employees depends upon the applicable legislation and must be determined on a case-by-case basis – There is no concrete formula for determining whether a worker ought to be classified as an employee. Certain factors will generally be considered, such as the control, direction and disciplinary powers exercised over the workers. However, employers must be aware that a worker may not be an employee for the purposes of employment standards legislation, while simultaneously being an employee/worker for the purposes of other legislation, such as the Employer Health Tax Act, the Income Tax Act,the Workplace Safety and Insurance Act and the Occupational Health and Safety Act.
  • Employers should educate themselves on all their obligations when in an employment relationship – Beyond what is owed to individual employees (i.e. overtime, vacation pay, etc.), employers must inform themselves of their additional obligations under provincial or federal legislation, due to being in an employment relationship. Such obligations may include specific taxes, required insurance and the responsibility to provide a safe workplace.

In general, this case demonstrates that employers must do their due diligence before jumping to conclusions about how an employment relationship should be classified. Failure to do so could result in unintended statutory violations and significant financial liability.

Chetan Muram


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