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Not an employee? Not an independent contractor? How the courts define the hybrid

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Increasingly, Canadian courts have recognized an in-between class of agents that are not technically employees or not technically independent contractors. Over the past few years, our courts have come up with a hybrid category of agents called “dependent contractors.” These are independent individuals who work so closely with employers, and whose relationship status with their “employer” is so sufficiently long-lasting, as to allow them entitlement for reasonable notice.

The factors that courts consider relevant to the finding of this hybrid “dependent” status includes the individual’s length of service, the degree of exclusivity, the time and resources the individual has devoted to the company and the type of restrictions imposed on him or her with respect to working for competitors.

One of the seminal cases of the dependent contractor status is McKee v. Reid’s Heritage Homes Ltd., wherein the Ontario Court of Appeal reviewed a trial judge’s decision determining whether the plaintiff, McKee, who had worked for Reid’s Homes (RHH) for approximately 18 years, was an employee or a dependent contractor.

The Court addressed whether or not there is a hybrid position of dependent contractor that exists within the context of employment law. The Appeal Court confirmed that this class of category does exist and further explored what it means. The main factor that can be taken from the case was “whether or not a relationship of economic dependency is present.”  This would usually occur when the contractor works nearly exclusively or exclusively for an employer.

The Court found that there is a process to determine this status. First, a court must decide whether or not the agent is limited exclusively to the service of the principal and the agent is subject to the control of the principal, not only as to any products sold, but also as to when, where and how they are sold. A court would also look at whether or not the agent has an investment or interest and how his or her tools are related to the service. A court would further look at whether or not the agent has undertaken any risk in the business or has any expectation of profit associated with the delivery of his or her service as distinct from a fixed commission. Lastly, a court would look at whether or not the activity of that agent as part of the entire business organization of the employer for which he works.

The above is the technical test. The quick elimination test that I use asks whether or not a worker (an independent contractor, employee or whatever you want to call him or her) is economically dependent on the employer due to the exclusivity in their work. In other words, is there a great degree of reliance by the worker on the employer? In the McKee v. Reid’s case, the Court of Appeal found that McKee worked for RHH exclusively and was subject to RHH’s control over where she would sell homes and how much to sell the homes for. She was financially dependent on RHH. Importantly, the Court noted that the fact that she had her own business did not negate the fact that she was economically dependent on RHH.

In a more recent case, Sarnelli (cob as East End Lock and Key) v. The Effort Trust Company, the Ontario Superior Court was asked to determine whether or not the business, Lock and Key, was an independent or dependent contractor. Judge Matheson noted that in employment law:

There are three different types of relationships that an employer may have. They are an employee, an independent contractor or what is called intermediate agents. It is trite to say that an employee may not be terminated without notice unless there is just cause. An independent contractor may have his work terminated without any notice after the work that the independent contract had is completed.

The facts in the case are quite simple. The plaintiff was a locksmith and had been a locksmith for the 17 years before the case. He trained with his father, who owned the company, as well as taking certain courses in the field. In 2000, his father transferred the business to him. He expanded the business his father had with the defendant, Effort Trust. The Court noted that the business with Effort Trust accounted for the majority of the plaintiff’s income. In 2003, Effort Trust accounted for $200,000 out of $261,763. In 2004 Effort Trust accounted for $369,154 out of $427,276.

In August of 2005, the defendant ended the contract with East End Lock and Key. Judge Matheson found that the plaintiff was on call for the defendant any time, day or night, and the billings brought into evidence showed that two-thirds of the plaintiff’s billings were from the defendant. He further noted that there was no doubt that the plaintiff lost his dominant employer and as a result sustained a tremendous blow to the viability of the plaintiff’s company. In 2006, the plaintiff gave up his business and sold his inventory. Judge Matheson found that East End Lock and Key was a dependent contractor and thus entitled to reasonable notice, of which he felt six months was warranted.

When an agent works exclusively for a single business entity—or nearly exclusively—and is dependent financially upon that business, a court may, and probably will, find that that agent is entitled to reasonable notice of termination. It is important for both employers and employees to know that this intermediate or hybrid class of contractors does exist in that these agents or dependent contractors will be entitled to reasonable notice if there is considered relevant finding of economic dependency and exclusivity with the employer company.

Perhaps employers, upon knowing a realizing this, should provide reasonable notice within the contract itself prior to dependent contractors beginning their role with the company. Employers simply cannot go wrong with doing this.

Matt Lalande or

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Matt Lalande, Lalande & Company Lawyers

Hamilton Personal Injury Lawyer at Lalande & Company Lawyers
Matt Lalande is a Hamilton lawyer and founder of Lalande & Company Lawyers. Lalande & Company is a Hamilton law firm that specializes in representing victims who have suffered life changing injuries, claimants denied long term disability, families of wrongful death victims and employment law litigation. Read more
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