Misclassification – IPG-105
Effective date: January 1, 2021
Revised date: March 6, 2024
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Subject
This Interpretation, Policy and Guideline (IPG) applies to all federally regulated employers. The purpose of this IPG is to:
- describe when the misclassification provision (section 167.1) under Part III of the Canada Labour Code (Code) applies, and
- explain how compliance is achieved when an employer is found to have misclassified employees
For more information on misclassification in the trucking industry, please consult the infographic Misclassification in the trucking industry.
Issue
There is a need for a consistent approach for determining whether the misclassification provision applies and how to achieve compliance. This IPG addresses the following:
- what is misclassification of employees
- examples of misclassification
- how to address the misclassification of employees
- determining whether there is intent to misclassify
Interpretation
Misclassification occurs when an employer does not consider or treat a person who is an employee, as an employee.
The determination of whether an employer – employee relationship exists is rooted in law, with a considerable amount of case law guiding the proper classification of employees. For guidance on determining the employer – employee relationship, please consult IPG-069 – Determining the Employer/Employee Relationship.
Misclassification often occurs when an employer considers a worker to be an independent contractor rather than an employee. This misclassification can result in the employee not receiving their labour standards entitlements under Part III of the Code, or other protections under various legislation.
The following are examples of misclassification:
- an employer misclassifies a driver as an independent contractor while the worker is exclusively working for that employer using the employer’s tools and equipment and meets the criteria to be considered an employee [paragraph 167(1)(b)]
- in some instances, the worker has chosen to or been required to set up a corporation and be paid as a service provider rather than as an employee (see example 1)
- an employer classifies an employee or intern as a student intern [subsection 167(1.2)]
- a student intern may be exempt from certain labour standards under the Standards for Work-Integrated Learning Activities Regulations (see example 2)
- an employer classifies a worker as an officer, director or associate of the corporation exclusively. This worker may be an officer, director or associate and be an employee. Alternatively, the worker may have invested in the business and have ownership shares in a business and be an employee. If the worker does not have any control or direction over the business and they meet the criteria, they may be considered an employee (see example 3)
The misclassification provision of the Code applies if the misclassification of employees was intentional and was to avoid compliance with labour standards requirements. If this is the case, an employers may be subject to administrative monetary penalties, under Part IV of the Code, if they are found to have misclassified employees:
- intentionally, or
- repeatedly over time
Establishing intent
Initially, evidence showing intent to misclassify may not be available and the following will apply:
- First instance of founded misclassification: An employer will be provided with guidance and counselling on how to classify employees and on the labour standards that apply for employees. Should corrective measures be required, the employer will be provided with information on the steps to address the misclassification and to achieve compliance with the Code, including paying wages that may be owed to employees.
- Subsequent instances of founded misclassification: An employer will be directed to address the misclassification and compliance measures will be applied to achieve compliance.
- In this case, intent will have been established and a notice of violation may be issued.
- In addition, the employer will be required to pay wages owed to employees, which may trigger wage recovery.
Addressing misclassification
There are a number of compliance tools that may be used to address misclassification of employees. They are applied in a continuum to address varying level of compliance and intent. The tools will be applied as follows:
Guidance and counselling: In this case, an employer will be informed on their obligations under the Code, through counselling sessions. Information on the Labour Program’s website is also available.
Assurance of Voluntary Compliance (AVC): This tool is used when an employer acknowledges their error and agrees to remedy the misclassification and, if applicable, pay wages owed to misclassified employees. The AVC outlines corrective measures that the employer must implement to comply with the Code and the timeline for doing so.
Compliance Order: This tool is used when an employer has failed to implement corrective measures and non-compliance continues.
Administrative Monetary Penalty (AMP): This tool is used when an employer has not complied with the compliance order and is intended to encourage compliance.
Publicly Naming the Employer: This tool is used to identify employers who received a notice of violation for failing to comply with a provision under Part III of the Code.
Misclassification under the Canada Labour Code and status under the Income Tax Act
A finding of employer – employee status under the Canada Labour Code is independent of the status under the Income Tax Act. For the Canada Labour Code, a worker is either an employee or is not an employee. If they are not an employee, they are often independent contractors.
An employee, who has full labour standards rights under the Canada Labour Code, may have a separate classification status for the purposes of the Income Tax Act: employee or personal service business.
Given the two Acts, there are two possible employment relationships:
Traditional employer – employee relationship: In this case, for the purposes of the Canada Labour Code and the Income Tax Act, the worker is treated as an employee.
Incorporated employee relationship: In this case, for the purposes of the Canada Labour Code, labour standards apply, and for the Income Tax Act, the personal service business requirements apply to both the employer (payer) and employee.
Where there are questions of employment status, the Labour Program and the Canada Revenue Agency will make determinations for their respective Acts: the Canada Labour Code and the Income Tax Act.
Examples
Example 1
AJX Transport, employer of Sergey, an incorporated driver, has not paid Sergey general holiday pay since he joined the company 7 months ago. AJX said that he would not receive general holiday pay because he is an independent contractor.
After an employer/employee relationship assessment, Sergey is found to be an employee under the Code and is entitled to general holiday pay for each holiday that occurred in the 7 months of his employment.
The Labour Program has no previous compliance information on AJX Transport and determines that this is a first-time offence that is unintentional. The Labour Program provides guidance and counselling on the classification of workers and the labour standards provisions for employees. AJX Transport acknowledges the error and agrees to correct their practices. An AVC is prepared outlining the measures the employer will take, including paying wages owed to other employees who may have been misclassified.
Example 2
Francine, an intern at Tech Broadcasting, was hired initially as a student intern who was unpaid. However, when her studies ended, Tech Broadcasting asked her to continue working and continued to treat her as a student intern paying her less than the minimum wage and not paying for overtime.
Francine is found to be an employee and is to be paid at least the minimum wage and overtime pay, when it applies.
The Labour Program has evidence of a previous violation for misclassification, having received an AVC, and finds that the employer was aware of the change in employment status from student intern to employee status.
While Tech Broadcasting agrees to corrective measures for Francine and pays her the wages owed, they are found to have intentionally misclassified an employee to avoid their obligations under the Code, namely paying the minimum wage and overtime.
Since Tech Broadcasting qualifies as a small business and is in its first penalty, the Labour Program gives an AMP in the amount of $3000 to Tech Broadcasting for contravening the misclassification provision.
Example 3
Shinmin has been working as a driver for Swan Trucking for 5 years. Last month, Shinmin became a shareholder of Swan Trucking by investing $10,000 in the company.
Following the investment by Shinmin, Swan Trucking no longer treated Shinmin as an employee, and claimed that the worker was now a co-owner of the company.
Following a complaint from Shinmin, an employer/employee relationship assessment was conducted. Shinmin was found to be an employee of the company.
The evidence did not clearly demonstrate whether Swan trucking intended to knowingly misclassify Shinmin in order to avoid their obligations under the Code. Since this was the first-time that Swan Trucking misclassified an employee, the company received counselling and was educated on their obligation to comply with the Code. Swan Trucking took the necessary measures to make sure that they do not misclassify other employees.
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