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 when determining whether a person is an employee or a contractor. 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.
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. Keenen that he would thereafter work as a Canac sub-contractor basically performing the same tasks. Mr. Keenan operated as a sole proprietor. Thereafter Mr. Lawrence continued to wear Canac shirts, Canac business cards, enjoy employee discounts and he received a signet ring for 20 years of loyal service
In 2007 Mr. Keened started to perform services for a Canac competitor because Canac’s business was slowing 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 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 true independent contractor is generally not entitled to any notice of termination. A dependant contractor, however, is entitled to notice of termination. Mr. Keenan 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 or a dependent contractor is NOT determinative. Administrative tribunals, courts and the CRA do not find this agreement binding on them.
- If an employer exerts consider control over a contractor in terms of how the services are provided or the contractor derives a considerable majority of its revenue from one organization there is a risk the contractor will be found to be a 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 a dependent contractor then the employer should include a termination provision which sets out the employer’s notice obligations.