Changes to the Employment Standards Act: business and IT consultants

Effective January 1, 2023, Ontario’s Employment Standards Act, 2000 (“ESA” or the “Act”) will no longer apply to employees who are business consultants or information technology consultants, subject to criteria in section 3(7) of the Act.

The effect of this change applies only to employees, and not true independent contractors. It takes away the ESA protections from the employees who satisfy the criteria set out at section 3(7).  However, it does not change the employee’s status to an independent contractor, unless they truly are so by definition.

It is also possible that this change could easily be misunderstood to mean that independent contractors can automatically become employees. This is not the case. The test within Ontario government’s ESA Policy and Interpretation Manual and Your Guide to the ESA (“ESA guidelines”) that determine whether an independent contractor is an employee, and vice versa, has not changed. That test will be the subject of a future post.

So, what does this mean for employers and employees? To answer this question, we first look at what the Act says, followed by how the change affects employers and employees.

Alternatively, skip to In Summary below for the short answer.

THE ESA

According to section 3(1) of the ESA, the Act applies to an employee and his or her employer if the work is to be performed in Ontario, or in Ontario and outside of it if the latter is a continuation of the Ontario work.

Section 3(5) of the Act clarifies that the ESA does not apply to individuals and any person for whom such an individual performs work or receives compensation, such as a business consultant or an information technology consultant (also referred to as an IT consultant in this blog) as listed in paragraph 11.1, if the requirements of subsection 3(7) are met.

These new consultants are defined in section 1(1) of the Act as follows:

• “business consultant” means an individual who provides advice or services to a business or organization in respect of its performance, including advice or services in respect of the operations, profitability, management, structure, processes, finances, accounting, procurements, human resources, environmental impacts, marketing, risk management, compliance or strategy of the business or organization;
• “information technology consultant” means an individual who provides advice or services to a business or organization in respect of its information technology systems, including advice about or services in respect of planning, designing, analyzing, documenting, configuring, developing, testing and installing the business’s or organization’s information technology systems;

For the purposes of paragraph 11.1 in section 3(5), the following are requirements listed in section 3(7), that, if satisfied, exempts a business consultant or IT consultant entirely from the ESA:

1.  The business consultant or information technology consultant provides services through,

     i.  a corporation of which the consultant is either a director or a shareholder who is a party to a unanimous shareholder agreement, or

    ii.  a sole proprietorship of which the consultant is the sole proprietor, if the services are provided under a business name of the sole proprietorship that is registered under the Business Names Act.

2.  There is an agreement for the consultant’s services that sets out when the consultant will be paid and the amount the consultant will be paid, which must be equal to or greater than $60 per hour, excluding bonuses, commissions, expenses, travelling allowances and benefits, or such other amount as may be prescribed, and must be expressed as an hourly rate.

3.  The consultant is paid the amount set out in the agreement as required by paragraph 2.

WHAT DOES THIS MEAN FOR EMPLOYEES AND EMPLOYERS?

For employees who are business and IT consultants, this means that if you check all three boxes in section 3(7) above, whether operating as a sole proprietor (with a registered business name) or a corporation, I have bad news: you are excluded from the protections of the ESA. However, from a relationship aspect, you can still be considered an employee, despite being exempted from the ESA.

On the other hand, if you check one of the three boxes or none at all, then you are likely not exempted from the ESA. For example, if you are an employee operating as a sole proprietor but not registered under the Business Names Act, and do not have a consulting agreement with the terms set out in paragraph 2, you likely would not be exempted from the ESA.

Employees who are exempted or excluded from the ESA will not benefit from certain rights, exemptions and special rules. These include but are not limited to limits on the hours of work (Part VII), overtime pay (Part VIII), minimum wage (Part V), and termination and severance pay (Part XV).  However, the employee will still have contractual rights, for which the parties are bound, and protections under common law and other legislation such as the Human Rights Code, Occupational Health and Safety Act, etc.

For employers, it is important to note that employees, who are business consultants and IT consultants and are exempted from the ESA, can still be considered an employee within the meaning of the Ontario government’s ESA guidelines. However, upon the termination of such an employee, neither the employer nor the employee will have an enforceable claim under the ESA. There may, however, be enforceable claims under a different legal regime, such as the common law. Each party would need to consult with a lawyer to discuss any potential contractual disputes.

For instance, if Jamie was hired as a business consultant on January 10, 2019, they would be entitled to claim under the ESA if their employment was terminated before January 1, 2023. However, if Jamie is terminated on February 15, 2023, and meets the criteria in section 3(7) of the Act, then Jamie would now be exempt from the ESA regardless of what their contract says. Jamie may, however, be entitled to reasonable notice under the common law.

Employers should contact their lawyers to discuss how these recent changes to the ESA may affect their workforce and before entering into or revising any employment contracts.

For independent contractors, it is important to note that, despite the listed criteria, a true independent contractor remains an independent contractor within the meaning of the ESA guidelines, unless the relationship falls within the definition of an “employee”.

If you’re an independent contractor and unsure whether you are actually an employee for ESA purposes, you should consult with a lawyer to discuss this (and always seek legal advice before entering into an agreement regarding your supply of services, or in the event the agreement has been terminated)

IN SUMMARY

Employees who are business consultants or information technology consultants may be exempted from the ESA (and thus will not receive its minimum entitlements) if they meet the criteria under section 3 (7) of the ESA. However, they may still be considered employees for other purposes, and may have rights under the common law.

Those business or IT consultants who do not meet the s. 3 (7) criteria retain their ESA protections.

True independent contractors do not automatically become employees (for ESA purposes) as a result of the new changes, nor do employees become independent contractors (unless they fall within the government’s definition, which will be the subject of a future post).

Employers and workers should obtain legal advice to determine their rights and obligations as a result of the recent change taking into account their own unique situations.

Although these amendments come into force on Jan. 1, 2023, the Ministry of Labour, Immigration, Training and Skills Development for Ontario (“MOL”) has not yet updated their interpretation manual or ESA guideline or released any regulation prescribing any other requirements. Please return here for updates as matters develop.

If you are an employee (including a business or IT consultant), employer or an independent contractor (whether the MOL thinks you are or not), I can help you with most workplace issues, including employment standards and contracts. I have more than 25 years of experience as an employment lawyer with satisfied, repeat clients.

If you are a legal or HR professional, I am an experienced and accredited mediator and arbitrator of employment law disputes, including those pertaining to alleged misclassification of employees and contractors.

Note: This blog is for educational purposes only and is not intended as legal or other professional advice.