Class-Action Lawsuit Alleges 7,000 People Were Misclassified As Independent Contractors - Are You Doing It Right?

Yesterday, we heard about a serious case of independent contractor misclassification. In an article published in The Toronto Star, titled; “Father living off $3.32 an hour launches class-action against energy giant,” we’re told how Haidar Omarali worked as an independent contractor, yet he was treated like an employee. While his classification was that of an independent contractor, the company he worked for provided him with a pre-written script for what to say to customers, told him what to wear in the form of company branded clothing and trained, supervised and disciplined him.

According to the Toronto Star, the class-action lawsuit alleges that the company Haidar Omarali worked for, misclassified 7,000 employees as independent contractors to avoid legal obligations like minimum wage. The lawsuit also alleges that the company made significant savings on things like basic pay, overtime, and Employment Insurance (EI) contributions since only workers designated as employees are entitled to such workplace rights. The case has yet to be tested in court.

In our opinion, this is the beginning of a trend, as we think many other cases like this, will start to fill the courts across Canada and the US. 

What makes this interesting is that these legal cases are being pursued by the contractors themselves, and not the US Government or the Government of Canada, as at the foundation of a corporation’s duty is the remittance of source deductions.

Increasingly, we’ve seen companies look at the avoidance of mandatory legislative burdens as a “savings” opportunity. Benefits that by law, any employee is entitled to. The most significant of which is employment insurance. It is typically a claim for unemployment insurance on the part of a vulnerable misclassified resource, that leads to their discovery of misclassification.

Unfortunately, many unskilled people just don’t understand what it means to be an independent contractor and are occasionally taken advantage of, which is what makes this practice so wrong. An independent contractor is directly responsible for source remittances inclusive of CPP, and the cost of corporate or sole proprietor tax filing. If they were properly classified by their employer in the first place, they would be entitled to the benefits they have a right to. 

By misclassifying a resource as an independent contractor, a company avoids the Employment Standards Act and the requirement to abide by fair labor practices. The independent contractor, on the other hand, gives up termination without notice or cause, rights to workplace protections, and the ability to claim unemployment insurance.

In the Toronto Star article, it’s alleged that 7,000 people were classified as independent contractors, so what’s the corporate responsibility?  

One of the principles of directorship is governance, and one of the most overlooked areas of governance is the proper classification of employees deemed to be associated with 3rd parties and independent contractors. In the vast majority of cases, those resources are full-time equivalents. A program that applies a policy with Executive sponsorship and an understanding of these risks helps companies avoid them.

As is the case with door-to-door programs, some companies may be presenting falsely inflated growth figures, via new installation and new customer data, because of the practice of using misclassified independent contractors, and/or vast numbers of door-to-door sales resources rapidly processing new activations. Through a 3rd party, the managing party has no obligation to abide by employment standards legislation yet the company gets the direct benefit of the revenue. 

Consider the cost to a brand’s goodwill? 7,000 people filing a class action against a corporation may have a significant negative impact on a brand overnight. Especially, if you’re a highly visible business-to-consumer (B2C) corporation. In many cases, these are also your customers. It was historically Fortune 1000 companies themselves who had to weigh the cost benefits, but that is not quantifiable today with social media exposure and bad press. The risks could be significantly higher than the avoidance of mandatory legislated burdens.  

Here at HCMWorks, we help our client’s better manage classification categories and help them to gain visibility and insight into these categories. If you want to know if you're exposed to the risk of misclassification, please contact us.

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