Employee or Contractor? That is the $64000 Question
For over 25 years, clients have been asking me whether a person is an employee or a contractor in various legal contexts.
When the Question Arises
“A former contractor is pregnant and is claiming employment insurance maternity benefits and now Revenue Canada says I owe EI and CPP premiums on the compensation I paid her.”
“The Workplace Safety and Insurance Board has audited me and tells me I owe WSIB premiums on the compensation I paid to a bunch of contractors.”
“A former contractor has filed a claim for vacation pay, overtime pay, statutory holiday pay, termination pay and severance pay under the Employment Standards Act.”
“A former contractor has sued me for wrongful dismissal.”
Administrative tribunals and the courts apply the same basic legal test. The intent of the parties as evidenced in a contract is considered along with a number of other factors. One of the factors is: How financially dependent is the contractor/employee on the organization?
The Ontario Court of Appeal Speaks
Earlier this year in Keenan v. Canac Kitchens Ltd, the Ontario Court of Appeal further clarified this area of employment law.
The Facts
In 1976 Mr. Keenan began working for Canac Kitchens. Initially he installed kitchens and he was later promoted to foreman. In 1987 Canac told Mr. Keenan that he would thereafter work as a Canac sub-contractor basically performing the same tasks. Mr. Keenan operated as a sole proprietor. Thereafter Mr. Keenan continued to wear Canac shirts, use Canac business cards, enjoy employee discounts and he received a signet ring for 20 years of loyal service.
In 2007 Mr. Keenan started to perform services for a Canac competitor because Canac’s business was down. In March 2009 Canac ended its relationship with Mr. Keenan. At that time 72.3% of his revenue was derived from his relationship with Canac.
The Decision
The Court of Appeal concluded that Mr. Keenan was neither employee nor an independent contractor; rather he was a dependent contractor. The court concluded that Mr. Keenan did not have to derive 100% of his income from Canac to be a dependent contractor.
A dependent contractor is entitled to notice of termination. Mr. Keenan had earned a living at Canac for 33 years and he was 63 years old when Canac terminated its relationship with him. The trial judge ordered Canac to pay him 26 months pay in lieu of notice, and the Court of Appeal upheld this damage award.
Lessons to be Learned:
- The fact that a person agrees he is an independent contractor and not an employee is NOT determinative. Administrative tribunals, courts and the CRA do not find this agreement binding on them.
- If an employer exerts considerable control over a contractor in terms of how the services are provided or the contractor derives a considerable majority of his revenue from one organization there is a risk the contractor will be found to be an employee or a dependent contractor who is entitled to notice of termination.
- If there is a risk that a contractor could be found to be an employee or an independent contractor, the employer should include a termination provision which sets out the employer’s notice obligations.
For more than 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at [email protected]
There are many ways to attack the termination clause in an employment contract.
I am now surprised if employee counsel does not claim that their client’s termination clause is not legally enforceable - usually because the termination clause does not allegedly comply with the Employment Standards Act.
This blog considers a case, McKercher v Stantec Architecture Ltd., 2019 SKQB 100, where an employee successfully attacked the termination clause in his contract because he did not explicitly agree to it after being promoted.
The Facts
In 2006, Mr. McKercher commenced employment as a staff architect. The termination clause in his employment contract stated:
Termination other than for cause will be with notice or pay in lieu of notice, based on your length of service. If the Employer terminates your employment for other than just cause you will receive the greater of:
- a) Two weeks notice or pay in lieu of notice during the first two years of employment increasing by one week for each additional completed year of employment to a maximum of three months notice or pay in lieu of notice.
or
- b) The minimum notice of termination (or pay in lieu of notice) required by applicable statutes.
Eleven years later, when Mr. McKercher was employed as a Business Centre Sector Leader, his employment was terminated. The employer paid him the three months termination pay he was owed under his employment contract.
Another way to attack a termination clause: What is the changed substratum doctrine?
An Ontario judge in a 2012 case, MacGregor v National Home Services, 2012 ONSC 2042 (CanLII), described this legal doctrine as follows: "The changed substratum doctrine … provides that if an employee enters into an employment contract that specifies the notice period for a dismissal, the contractual notice period is not enforceable if over the course of employment, the important terms of the agreement concerning the employee’s responsibilities and status has significantly changed."
The rationale for this doctrine has been described by one judge, Schmidt v AMEC Earth & Environmental Ltd., 2004 BSCS 2012 (CanLII), as follows: "In my view, it was incumbent on the defendants to advise Mr. Schmidt that they intended to continue to rely upon the termination provision set out in the Agreement when substantial changes in his employment occurred. This would have allowed him to consider the matter and to negotiate for other terms. If the defendants wished to continue to rely on the termination provisions there ought to have been a ratification of the provisions as the nature of Mr. Schmidt’s employment changed."
Decision
The judge hearing this case relied on the following factors when deciding not to enforce the termination clause in the employment contract: ”...there is no evidence that (the employer) made it clear to the (employee) that the notice of termination provisions were intended to apply to the positions to which he was promoted. The employment agreement contains no express wording to this effect, nor does it contain any wording to support the inference of such an intent. Further, and in keeping with the analysis in Schmidt, the Court received no evidence that, as it promoted the plaintiff, SAL reasserted its understanding and expectation that the notice of termination limit would remain in effect.”
Lesson to be learned:
An employer should make it clear that the termination clause in an employment contract applies when an employee is promoted. This expression of this intent should be in writing and should be clear and unambiguous. I recommend that an organization’s employment be reviewed by an employment lawyer every year or two. If your employment contract does not address this issue then think about doing so the next time it is reviewed.
For 30 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at [email protected]
The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.
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