Published July 29, 2013
"Dependent contractor" - this is a third category of employment relationships that we rarely discuss, and most organizations have never heard of, but which is probably one of the more relevant to sport and certainly an increasing way in which contracts are being structured (often unwittingly). Its importance lies in the fact that such a worker relationship can import a significant liability to sport organizations.
What is the difference between an independent contractor and a dependent contractor, and what is the impact for the sport organization? The impact relates to the legal need to give notice, or pay a severance in lieu of notice, to a dependent contractor in the event of termination – something that is not required for independent contractors. In this regard, a dependent contractor is akin to an employee. Nonetheless, a dependent contractor is NOT an employee because the organization has no responsibility to withhold a dependent contractor’s income tax payments, pay for holiday time, or assume employment benefits as it might for an employee. And, the issue of liability is the same as for the independent contractor. The dependent contractor is thus a hybrid somewhere between an independent contractor and an employee.
Employee, Independent Contractor or Dependent Contractor?
Dependent contractors fall within the contractor category of workers. We have written extensively on this web site about how to determine whether a worker is an employee or an independent contractor (and the repercussions flowing from each category in terms of liability and beneficial payments beyond employee salaries).
Once it has been determined the worker is not an employee, it becomes a question of determining whether the worker is an independent contractor or a dependent contractor. Many individuals have tried to structure their working relationship with the sport organization as that of an independent contractor. Some have incorporated themselves, and even have employees within their corporations. One of the main reasons for migrating towards the status of independent contractor is to access the tax benefits afforded the independent contractor. Even for the organization, this can be a financially inviting option – organizations pay more that 21 cents on the dollar of an employee’s salary towards statutory costs that are unavoidable in an employment situation. As well, the independent contractor status can be a desirable option in order to transfer some areas of liability.
The sole criterion used to determine the difference between the independent contractor and the dependent contractor is the "exclusivity of the contractor"– is the contract with the organization the sole source of income for the contractor? Many workers rely on a contract as their sole source of income, and this exclusivity typically makes them dependent contractors.
Impact of Dependent Contractor Status
There are three main areas of potential benefit to the organization by structuring a working relationship as an independent contractor (as opposed to an employment relationship): transfer of some liability away from the organization; relief from mandatory benefit and statutory payments, and; no application of statutory termination conditions (e.g., notice or severance payments in lieu of notice). The first two factors are unaffected by “dependent contractor” status. In these ways, the independent contractor fits the "contractor" mold.
It is the third factor that is affected. The terms of the contract still apply (i.e., a worker can still be terminated according to the terms of the contract); however, when a dependent contractor is terminated, regardless of the contractual terms regarding termination, a form of notice or severance payment in lieu, consistent with statutory or common law requirements, may be required. On this element, the dependent contractor is reflective of an employee.
A dependent contractor will be determined to be one who is solely dependent, or entirely dependent, on the contract with the organization. The individual has no other significant contracts (i.e., other contract(s) the person may have are minor and realistically not part of a complement of clients that could sustain the individual in their business).
Many coaches, media and marketing people, bookkeepers and others may find themselves in the situation of a dependent contractor with an organization, even where they may have assumed independent contractor status. For them, there is no penalty (as there would be if their status were misconstrued between employee and independent contractor and they could be responsible for statutory payments). Most organizations include contractual clauses that address situations where the status between employee and contractor has been wrongly construed (and if they do not have these clauses - they should). But that does not help here. The negative consequences of a wrong determination between independent and dependent contractor flow solely to the organization. The organization is responsible for ensuring proper notice (regardless of the contractual provisions if they are less than legally expected) or the payment of severance in lieu of proper notice.
In other words, in terms of termination, the dependent contractor is treated as an employee. (Organizations do not have the option of having the person ‘contractually’ agree they are not a dependent contractor under the terms of their contract!)
What to Do?
With each contract that is not with an employee, organizations should ask themselves:
1. do you intend for this individual (or company) to have independent contractor status?
2. if so, is this person (or company) working exclusively for you? If the contractor is economically vulnerable by virtue of their exclusive, or nearly exclusive, relationship with you, you may be responsible for providing reasonable notice, or severance payments in lieu; and,
3. what termination provisions have you included in the contract? If the individual’s position could be interpreted as that of a dependent contractor, you should mirror what the law would require in an employment situation.
There are many issues here that organizations should address when drafting employment/contractor agreements. We are happy to help sort out the intricacies so please feel free to contact us.