Top 5 Employment Law Mistakes Entrepreneurs Unwittingly Make



Top 5 Employment Law Mistakes Entrepreneurs Unwittingly Make

Author: Caitlin Russell


This article takes a closer look at five employment law mistakes entrepreneurs unwittingly make, so you can avoid them.

Mistake #1 – Treating Employees as Independent Contractors

Small businesses often hire individuals as “contractors” instead of employees to avoid the costs associated with payroll and other employment-related entitlements like vacation, public holidays, overtime and notice of termination. In many cases, this arrangement is often accepted (or in some causes proposed) by the individual being considered for the role. While this may seem like an easy and cheap arrangement at the outset, it often does not work out that way for employers.

Misclassifying an employee as an independent contractor is a breach of Ontario Employment Standards Act (the ESA) and can create significant economic risks for business, including penalties and interest for failing to make tax deductions and remittances, unpaid CPP and EI premiums, orders from the Ministry of Labour to make back-payments for unpaid vacation, overtime and public holiday pay, and exposure to litigation on termination for wrongful dismissal.

To avoid these significant liabilities, before characterizing an individual as a “contractor” it is important to consider the following essential question: is the individual performing services on account of their own business? If not, the individual should be hired as an employee. The following factors are indicative of a true contractor relationship:

  • there is written independent contractor agreement;
  • invoices are issued for services rendered;
  • the individual is registered for GST/HST;
  • income tax filings are consistent with that of contractor;
  • the contractor has control over schedules and working hours;
  • the contractor provides services to other businesses;
  • the contractor supplies their own equipment (computer, home office space, etc.); and
  • the contractor assumes financial risk or has an opportunity of profit in the performance of their tasks.


Mistake #2 – Not Using an Employment Contract

There is a common misconception among small businesses that written employment contracts only benefit employees and are not worth the cost of preparing. In Canada, this is not the case.

Written employment contracts are valuable for employers in ensuring that the key terms of employment are clearly set out (including compensation, term and job duties) and in limiting entitlements that would otherwise be implied by law.

For example, in the absence of a specific term, the common law implies a term in every employment contract (written or unwritten) requiring the employer to provide reasonable notice, or pay in lieu of such notice, prior to terminating an employee. The factors that determine the amount of notice required include the employee’s position, age, length of service, and the availability of similar employment in the market. The amount of notice that must be provided will vary depending on numerous factors, but will usually far exceed the minimum notice entitlements prescribed by the ESA.

With an enforceable employment contract, employers can limit an employee’s entitlement to notice of termination, provided that the entitlement meets the minimum standards in the ESA. Employers can also use employment contracts to set out post-employment covenants, including non-solicitation and non-competition obligations, which are otherwise not implied at law.


Mistake #3 – Confusing Poor Performance with Cause for Dismissal

When an employee’s performance is not meeting expectations, the quickest solution often appears to be a termination of employment immediately “for cause” without notice of termination. However, unbeknownst to many small businesses, terminations for cause often result in litigation and end up being costly. Courts in Canada have been clear that the standard of misconduct necessary to constitute cause for termination is very high. Poor performance, on its own, is often insufficient to establish cause. In addition to damages for the appropriate notice period, terminating an employee’s employment for cause without a valid basis to do so can expose the business to additional liability for “bad faith” in the manner of termination.


Mistake #4 – Breaching Minimum Employment Standards

Each province in Canada has legislation that prescribes certain minimum entitlements for employees working in that province. Employees do not have the option of contracting out of these statutory minimums. Contracts that purport to offer the employee less than their minimum statutory entitlements will be found to be void, even if the employee voluntarily signed off on the arrangement.

Small businesses often have difficulty ensuring full compliance with the ESA, particularly when they do not have assistance from a human resources department or outside consultant. The most commonly breached minimum entitlements are as follows:

  • calculation of public holiday pay;
  • entitlement to overtime pay;
  • record keeping obligations;
  • vacation pay; and
  • hours of work rules.

Misunderstanding overtime rules in particular can expose a small business to significant liability. In Ontario, the ESA requires an employer to pay overtime wages at 1.5 times the employee’s regular wage rate after an employee has worked more than 44 hours in a week. Salaried employees are not automatically exempt from overtime entitlements. All employees are entitled to overtime, unless their role is managerial or supervisory in nature, or they fall within certain regulated exemptions based on their profession. Unpaid overtime has been a popular basis for attempted class actions in Canada, so it is important to pay special attention to compliance with applicable laws.


Mistake #5 – Not Appreciating the Duty to Accommodate

Human rights legislation in each province set out protections for employees that can often collide with the fast-moving plans of small businesses. In Ontario, the Human Rights Code, prohibits discrimination on the basis of ancestry, race, ethnic origin, place of origin, citizenship, creed, colour, sex, sexual orientation, gender identity, gender expression, marital status, family status, record of offences, disability and age. This prohibition applies to all aspects of the employment relationship, including hiring, discipline, promotion, work assignments and firing. Two key grounds to watch out for in the workplace are family status and disability. Employers have a duty to accommodate employees with family status or disability related issues to the point of “undue hardship,” which may mean providing flexible work schedules, time off for medical appointments or modifying job duties or physical work spaces.