Bringing dependent contractors out of the shadows

The courts have long acknowledged the existence of an intermediate position between employees and independent contractors, but the boundaries between the concepts are murky in the business trenches.

When business owners fail to recognize the true nature of their relationships, they leave themselves open to a nasty surprise when termination time comes around.

In December 2009, the Ontario Court of Appeal revisited the issue of employment and contractor categories in McKee v. Reid’s Heritage Homes Ltd.

The case confirms the existence of the intermediate class as well as the nomenclature of the dependent contractor in line with the Labour Relations Act. It also broadens the concept of who can be an employee to include those who run their own businesses in certain circumstances.

The unique circumstances of the McKee case involved a situation where an individual was selling lots and homes. Elizabeth McKee actually retained a number of subagents to provide her services, and they got a cut of her fee.

This arrangement continued for 18 years, a time when McKee worked exclusively for Reid’s Heritage Homes. During a restructuring of the sales force, it offered her a six-month engagement with a 14-day notice period. She rejected the offer.

Jeff Goodman of Heenan Blaikie LLP in Toronto says the McKee decision is critical because the court ultimately found her to be an employee even though she had her own workers. In doing so, it ruled she was entitled to 18 months’ notice because of her years of service and age. “In the past, it has been a very significant factor for courts to say that a person was running their own business,” says Goodman.

Stacey Ball of Ball & Alexander in Toronto agrees the case represents an important development in the law. “The worker had a private corporation, but that didn’t defeat her employment status. It shows that if you have a corporation for tax reasons, you still have to go through the employment law tests. It is not just the formalistic arrangements that are relevant. The court is required to look at the true nature of the relationship.”

The decision also sets out the correct approach for determining which category a worker falls into. Goodman explains the test isn’t about determining if someone is an employee, an independent contractor or a dependent contractor but rather whether a person is an employee or a contractor.

It’s only once the court finds someone is a contractor that it will look at the issue of dependence. “Justice [James] MacPherson in McKee never gets to that question because the worker is found to be an employee.”

Ball points out the dependent contractor category doesn’t make the employee class smaller. “It is carved out of the contractor class in general, creating an enhanced class of people who are entitled to protection.”

Goodman says this approach to the test will make it harder to escape the employee designation. “In the past, the concepts of employee and dependent contractor were pretty close to each other. Employers would try to avoid an employment finding by saying that someone was a dependent contractor because that dictates the level of notice of termination if it hasn’t been explicitly set out in the contract.”

Ross Wells at Gowling Lafleur Henderson LLP’s Kitchener office believes the case added some modern clarity to the topic. “It leaves no uncertainty of the entitlement of a dependent contractor for pay in lieu of reasonable notice,” says Wells, who represented McKee.

In the McKee case, it was critical to be a dependent contractor because her contract limited her to a very short notice period that clearly breached the Employment Standards Act. That notice period was unenforceable if she was an employee.

An employee’s notice entitlement can go as low as those provided for in the act while a dependent contractor can receive nothing. “Technically, you could contract for one week’s notice after 30 years’ service,” says Goodman.

It remains an open question as to how high a dependent contractor’s entitlement to notice can go since McKee didn’t address this issue. “In oral argument, we said it is capped at a year, whereas for wrongful dismissal, it is capped at two years,” says Wells.

“Justice MacPherson, in a question to the other side, accepted that but didn’t deal with it in the judgment. Earlier cases talk about dependent contractors not being entitled to the same notice as an employee.”

The court found McKee to be entitled to substantial notice because of her employment status. “The court found that she was integral to the business, so she was found to be an employee,” says Goodman. “The approach rolls back the Supreme Court decision of Sagaz [671122 Ontario Ltd. v. Sagaz Industries Canada Inc.], where the court had very unkind words for the integration part of the test and emphasized the control part.”

A dependent contractor isn’t integral to the business but has developed a level of closeness. “The worker might be the sole distributor or it might be the only company that person has ever done business with,” says Ball. “The key is the amount of exclusivity. There must be complete or near complete and exclusive dependence.”

The concept of the dependent contractor isn’t a well-known concept in the marketplace. “A lot of employers don’t have a clue,” says Ball. “They are not alive to this issue. At the time they are making the relationship, they need to take into account the risk it presents when it ends and be careful when terminating.”

Ball also believes it’s a new concept to many legal practitioners who are outside the core employment law bar even though the intermediate category has been recognized for years.

“It is a significant category because business owners may think that if they don’t employ people, then they don’t have to give notice. In fact, they could be exposed to liability for a year’s worth of notice. A lot of employers would not bank on that.”

Wells believes the decision emphasizes the need for employers to have written contracts with dependent contractors. “It is not done much in real life. Even in employment situations, they often don’t have contracts or they have contracts that don’t address notice provisions.”

McKee also flags the likelihood that it will be harder to appeal a finding that puts a worker in a particular category. “It’s a question of discretion,” says Goodman. “The court said it really wanted to show deference to the trial judge’s discretion. From a practical perspective, you can expect that they’re not going to interfere unless they really have to.”

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