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Practical perspective on employment law.

It is important that Canadian businesses and employees be familiar with some practical aspects of employment law as they manage their relationships. This article will answer some common questions and high-light some recent developments.

Employee vs. Independent Contractor

When hiring an individual to provide services, one of the most important issues that must be initially addressed is whether the individual is an employee or an independent contractor. This distinction is important because employees and independent contractors are treated differently under the law. Examples of this difference in treatment include the following:

* Employers are required to make deductions for source deductions -- such as income tax, employment insurance premiums, and Canada Pension Plan contributions, -- from their employees' pay and remit these deductions to the appropriate government authority. Independent contractors, however, must keep track of and remit these deductions themselves.

* Employees will typically be covered by their employers' liability insurance policies for acts conducted in the course of their employment. However, independent contractors are often not covered under these polices and therefore require their own insurance.

* Without an agreement stating otherwise, ownership of intellectual property, such as inventions and copyrighted works, may be determined based upon the nature of the relationship. Generally, an individual who develops intellectual property will own it unless the individual was an employee hired for the purpose of developing the intellectual property.

* Employees are generally expected to maintain sensitive information about their employer confidential. Independent contractors are not generally required to do so unless the information is communicated under implied or expressly agreed terms of confidentiality.

* Failing to accurately characterize an individual as an employee or independent contractor may have significant consequences. For example, an employer will be liable for source deductions if they fail to withhold these deductions from an individual who is considered to be a true employee under the law, even if the employer treated this individual as an independent contractor.

The courts have developed four criteria to determine whether an individual is an employee or independent contractor, as follows:

Control

If an individual has the power to dictate the method, place, and time that work is to be done, the power to determine who does the work, and the power to directly supervise the work being done, the individual is likely an independent contractor. If the business has these powers, then the individual is likely an employee. The absence or presence of control is often the most important criteria in distinguishing employees from independent contractors.

Ownership of Tools

If an individual owns the tools, materials, and equipment being used to do the work, the individual is likely an independent contractor. If the tools, materials, and equipment being used are owned by the business, the individual is likely an employee.

Chance of Profit

If an individual's remuneration is dependent upon the completion or success of the work, then the individual is likely an independent contractor. If remuneration is predetermined and payable on a regular basis, then the individual is likely an employee.

Risk of Loss

If the individual invests their own financial resources to the work, the individual is likely an independent contractor. If the individual's own financial resources are not at risk or the individual is reimbursed for any financial contribution, the individual is likely an employee.

Each of the above criteria may not be relevant or of equal importance, depending upon the circumstances. Indeed, an individual may be considered to be an independent contractor under one criterion and an employee under another. When most of the criteria, particularly the control criterion, points to the individual as an employee or independent contractor, then such an assessment is likely to be accurate.

To further complicate matters, note that an individual may be considered to be an employee for certain purposes and an independent contractor for other purposes. Application of the above four criteria is generally relevant in most cases. However, certain legislation, such as provincial human rights and workers' compensation legislation, may govern this determination for specific purposes.

Getting Employment Relationships in Writing

Prudent employers and employees should insist that key aspects of their relationship are in writing to ensure that their expectations are understood and that conflicts are minimized. Some of these key aspects include the following:

Identifying tasks and duties.

Conflict often arises when neither the employer nor the employee is clear about their duties and obligations. Having a written agreement, and reviewing it periodically to ensure that it is up-to-date, may eliminate future conflicts about who should take or accept responsibility for certain tasks.

Confidentiality clause.

Both during and after an employment relationship ends, employers want to ensure that trade secrets or other proprietary information is kept confidential. Clearly marking confidential information as confidential and ensuring that it is only disclosed on a need-to-know basis are also important.

Non-competition clause.

Where competition by the employee is a concern, the employer and employee should agree upon restrictions on the employee's ability to compete with the employer after termination of the relationship. These restrictions must be reasonable in the circumstances or a court will not enforce them.

Acknowledgement of written policies.

Employers often have extensive written policies that employees must follow. To ensure that these policies are binding, employees should acknowledge in writing that they have read and understood the policies and agree to comply with them.

Ownership of intellectual property.

The employer and employee should agree as to who owns the rights to any intellectual property developed by the employee, including inventions and copyrighted works.

When dealing with a relationship between an independent contractor and a business, it is very important that a written agreement be signed which deals with the above-noted issues, as well as issues relating to collection and remittance of source deductions, insurance, and indemnification from liability.

Employment Benefits: Changes to Maternity and Parental Leave

Recent federal and provincial legislative changes have significantly changed maternity and parental leave programs in Canada. The federal government led the changes by amending the Employment Insurance Act as follows:

* Reducing the qualifying period of work from 700 hours in the previous 52 week period to 600 hours;

* Increasing the duration of parental benefit payments (payable to either parent, whether natural or adoptive) from 10 weeks to 35 weeks. This means that biological mothers may receive up to 50 weeks (including the unchanged 15 week maternity benefits) of maternity benefit payments and parental benefit payments; and

* Increasing the amount of income that may be earned without deduction from parental benefit payments from $0 to $50 per week or 25% of the benefit amount, whichever is higher.

These changes are effective for parents of children born on or after December 31, 2000.

The changes made to maternal and parental employment insurance benefits, however, have created confusion among employers and employees because the changes to the Employment Insurance Act do not affect the amount of time a parent can take off from work for job-protected leave under provincial legislation. While employees who worked for the federal government or for federally-regulated employers (such as banks) are entitled to these extended leave periods, most other employees are not.

The federal government's changes to employment insurance benefits prompted most provincial governments to extend the time set in provincial legislation for job-protected maternity and parental leave as shown in the table. Note that employees must ensure that they meet the statutory prerequisites (in terms of number of weeks worked before such leave is granted) and must follow notice requirements when requesting such leave. Employers must grant such leave when properly requested and permit the employee to return to the same pay and job once the leave is over. Any additional leave will be a matter of negotiation between the employee and employer.

Employment Benefits: Employee Stock Option Plans

Employee stock option plans (ESOPs) have become popular as a means to retain and attract employees, and encourage employee performance. These plans give an employee the right to purchase shares in the employer corporation for a fixed price (the Exercise Price) which can be exercised within a specific period of time. If the share price of the employer corporation increases from the Exercise Price, then the employee gains financially upon exercising their right to purchase the shares and sell the shares.

The tax treatment of financial gains received by exercising stock options is generally more favourable than if the employee had earned this amount as salary, because of the following:

* the difference (the ESOP Employment Benefit) between the Exercise Price and the fair market value of the shares of the employer when the employee purchases these shares under the ESOP (the FMV on Exercise) is taxed as ordinary income (as an employment benefit), generally in the year that the employee purchases the shares; however, there is a tax deduction and tax deferral available in certain circumstances which reduces the tax payable and defers any payment of tax until the shares are sold; and

* the difference between the FMV on Exercise and the sale price of these shares when the employee sells them is taxed as a capital gain, which receives better tax treatment than ordinary income.

Recent changes to the Income Tax Act have further enhanced the value of ESOPs to employees by improving the tax treatment of any financial gains, provided that these plans are structured appropriately and certain criteria are met. These changes include the following:

* only fifty (50%) percent of capital gains are now taxable (50% of the capital gain is included as part of and taxed as ordinary income);

* a fifty (50%) percent tax deduction is available on the ESOP Employment Benefit in certain circumstances; and

* the tax deferral available for the ESOP Employment Benefit has been expanded to include purchases by employees of publicly listed shares, up to a maximum of $100,000 per year, in certain circumstances (this deferral was previously only available to qualifying Canadian controlled private corporations).

The specific rules and requirements to qualify for the above-noted tax deductions and deferrals are complicated and beyond the scope of this article. However, corporate employers who wish to implement an ESOP should ensure that they structure their plans in a tax-effective manner for employees, and should consult with tax and accounting advisors in this regard. They should also consider other legal requirements, such filing requirements under provincial securities legislation.

Terminating an Employment Relationship

Reaching a decision to fire an employee or leave a position is often a difficult process that is rarely achieved without upheaval and uncertainty. This part of the article will suggest some options for both sides to consider when facing the end of an employment relationship.

Look at the original agreement first

A well-drafted employment agreement will incorporate a termination clause that will govern how either party may end the relationship prematurely. Notice periods, what to do with work-in-progress, and the return of confidential information will likely be included.

Comply with the legislation

Most employers and employees are governed by provincial employment legislation which sets out certain minimum notice requirements that must be provided. Note that these are the minimum requirements, and that in almost all cases the notice required by law will be greater, depending upon the circumstances. As well, vacation pay, holiday pay and overtime must all be reconciled at the end of the relationship. Further, employers are obligated to provide employees with a Record of Employment for employment insurance purposes under federal legislation.

Think about a termination agreement

Even where there is an original written agreement, or where only minimum standards apply, both parties should consider resolving the following issues in writing:

* Payment or notice. Where one party leaves in exchange for a payment or provision of a certain amount of working notice, it is critical to have the exact number in writing. Accrued benefits, RRSP or pension contributions, holidays, vacation days, sick days, progress payments, expense claims, withholding amounts (for source deductions such as taxes, CPP and EI), and stock option plans should be discussed and agreed upon by both parties before the final cheque is issued.

* Confidential information and employer's property. Employers will be particularly concerned to ensure that confidential information is returned or destroyed where possible. Where the information cannot be returned or destroyed, the parties should agree to continue to keep the information confidential. Arrangements should also be made regarding the return of keys, equipment, and other materials owned by the employer.

* Referrals and recommendations. Where possible, the parties should agree on how the departing employee will be portrayed to third parties by the employer. For example, employees and employers often negotiate the wording of a recommendation letter, and which officer of the employer will be designated as the contact person for inquiries about that employee.

* Releases from future lawsuits or claims. The final step for the parties to consider, after all other outstanding issues are resolved, is the release that each is prepared to give the other (if any). Prior to signing a release each side should review it carefully to ensure that it covers either all claims that may arise or only those specific claims from which the parties have agreed to release each other.

Conclusion

Proper planning and management of the relationship between an employer and employee, and the relationship between a business and an independent contractor, will improve communication and minimize future disputes among the parties. Practical means of achieving these objectives include accurately characterizing the relationship as an employment or independent contractor relationship, entering into written agreements to define the rights and obligations of the parties, and complying with legislation to ensure that benefits which are granted under law are given and enhanced benefits which are intended to be granted are legally effective.

Province Maternity leave Parental leave Combined
 (weeks) (weeks) maximum
 (weeks)

Alberta 15 37 52
(*)British Columbia 17 37 52
Manitoba 17 37 54
(*)Ontario 17 37 52
(*)New Brunswick 17 37 52
Newfoundland 17 35 52
Northwest Territories(1) 17 12 29
Nova Scotia 17 35 52
Nunavut presently under discussion
Prince Edward Island 17 35 52
Quebec 18 52 70
Saskatchewan 18 12 30
Yukon Territory(2) 17 12 29

(1) Under review. Parental leave will be extended on April 15, 2001 to 35
weeks, for a maximum total of 52 weeks.

(2) Under review. Yukon residents should consult their Labour Standards
department for more information.

(*) These provinces allow a combination of maternal and parental leave but


the total cannot exceed 52 weeks.
COPYRIGHT 2001 Legal Resource Centre of Alberta Ltd.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Chen, Scott H.; Robinson, Heidi K.
Publication:LawNow
Date:Jun 1, 2001
Words:2394
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