This article will outline the 3 types of working relationships.
Additionally this article will outline why most independent contractors are not really independent contractors and as a result are legally entitled to a full severance.
Many employers decide to hire people as independent contractors who in the eyes of the law are employees or dependent contractors. The law does not care that you signed a contract saying you are an independent contractor. The law also does not care that you have a company and you filed deductions on your tax returns as an independent contractor. What the law cares about is what is the real nature of the relationship.
Most people who think they are independent contractors are employees or dependent contractors. Both employees and dependent contractors are entitled to common law notice which usually is 10’s of thousands of dollars and often reaches six figures for longer term or more senior employees.
McMackin Law can help you obtain the severance package that you are legally entitled to.
The Employment Standards Act (hereinafter “ESA”) unfortunately fails to provide a useful definition for employee and independent contractors. As a result, the common law (decisions by Judges) have made the necessary determinations.
An independent contractor is in business for themselves. An employee by contrast would be in business for their employer. There are tests for this which are discussed at length in this article.
A contractor who exclusively or near exclusively works for an employer.
Independent Contractors are not subject to the ESA. Benefits of hiring an independent contractor from an employer perspective are as follows:
There are usually 3 primary reasons in which people want to be an independent contractor.
From a legal perspective the advantages of independent contractor agreements are far outweighed by the negatives. In almost all cases the employer benefits substantially more from these agreements.
The reason that this occurs is the nature of the relationship. In an employer-employee relationship it is clear from the outset that the employer will usually have significant more bargaining power. It is also viewed as a contract of service. As a result, the ESA is in place to protect and limit the ability in which employers can limit employee rights.
In an independent contractor relationship, the agreement is a contract for service. This relationship can best be characterized as a business relationship and is viewed as commercial in nature. Commercial relationships require significantly less statutory protections as both parties are assumed to be sophisticated and to possess similar bargaining power.
Most independent contractors simply do not know that they are probably employees or dependent contractors in the eyes of the law. They incorrectly assume that because they signed an independent contractor agreement, deducted expenses, have a company that invoices etc. that they are an independent contractor. As a result, they do not seek the many months of pay they are owed in common law reasonable notice.
In recent years, several class actions have been launched in relation to this issue. With that said, companies rarely face the consequences of independent contractor misclassification. Only a small percentage of people who believe they are independent contractors recognize, are aware or ever find out that they are likely entitled to a full severance package.
In order to determine the type of employment relationship and the rights that come from it there is a 2-step analysis required. The first step requires determining whether they are a contractor or employee. If they are found to be an employee, the analysis stops at that point. If they are not an employee then the 2nd step requires a determination of whether they are an independent contractor or dependent contractor.
The 2-step analysis comes from McKee v. Reid’s Heritage Homes Ltd., 2009 ONCA 916 (CanLII). This case is also where the 3rd type of employment relationship “dependent contractors” became recognized legally in Ontario. (see paragraph 30)
One crucial thing to note from this case aside from the 2-step analysis is what was said at paragraph 54.
“The fact that McKee operated through a business in her work for RHH from the beginning is not determinative of her work status”
Often people have concerns that because they had a business and made deductions / filed taxes as an independent contractor this would be determinative of their work status. McKee makes it clear that just because you had a business that invoiced the employer you are not necessarily an independent contractor.
There are 2 leading cases in Ontario which outline the distinction between employees and independent contractors.
The first is the Supreme Court of Canada decision in McCormick v. Fasken Martineau DuMoulin LLP, 2014 SCC 39 which outlines what is known as a control and dependency test.
Control refers to the amount of control you have over all things in your working life. This encompasses a vast array of things such as the following:
1) Who determines your pay?
2) Can you hire and fire individuals?
3) Who determines when the work is to be done?
4) Who determines how the work is to be done?
5) Etc.
Dependency refers to the extent in which an individual is economically dependent on the employer.
The more control and dependency that an individual is subject to the more likely they are to be an Employee.
The second case is the Ontario Court of Appeal decision in Keenan v. Canac Kitchens Ltd., 2016 ONCA 79 which clarified and elaborated on the McCormick decision:
· Tools: Who supplies the tools? Note: This does not just refer to tools such as screwdrivers. It refers to office(s), telephones, computers, filing cabinets etc.
· Exclusivity: Who does the individual perform work for and how much of their work is from this entity?
· Risk: Does the individual have a direct stake in the company’s performance?
· Control: Who determines the who, what, when, where and how the individual works? Can the individual hire and fire individuals?
· Integration to Organization: The term “whose business is it” was used by Justice Mew in relation to this part of the test. Does the employee provide a service to the organization or do they perform work on behalf of the organization?
It is important that you recognize that these tests require a balancing as some factors may suggest you are an employee while others suggest you are a contractor.
If it is determined that you are not an employee, then the 2nd step of the test is required. This test will determine whether you are a dependent contractor or independent contractor.
This test is highly relevant for many parties that believe they are independent contractors because if they are found to be a dependent contractor then they are entitled to common law notice. In most independent contractor agreements, the contractor will only be entitled to little if any notice. At common law, the notice period is significant. Common law reasonable notice typically ranges between 3 and 24 months of pay (including benefits, integral bonuses, car allowance etc.)
The 2nd part of the test requires the following question to be answered:
Does the contractor exclusively or near exclusively economically depend on the employer?
The 2 main cases relating to this issue (Canac Kitchens and McKee) never set caps on how much of the contractor’s income had to come from a single employer. The recent case of Thurston v. Ontario (Children’s Lawyer), 2019 ONCA 640 (CanLII) has created a high threshold for the near exclusivity economic dependency test. At paragraph 30 Justice Huscroft wrote as follows:
“Exclusivity is a categorical concept – it poses an either/or question, and “near-complete exclusivity” must be understood with this in mind. “Near-complete exclusivity” cannot be reduced to a specific number that determines dependent contractor status; additional factors may be relevant in determining economic dependency. But “near-exclusivity” necessarily requires substantially more than 50% of billings. If it were otherwise, exclusivity – the “hallmark” of dependent contractor status – would be rendered meaningless.”
Thurston was a lawyer who operated their own private practice. A series of fixed term contracts were entered into and after 13 years the Ontario Children’s Lawyer chose not to renew the contract. Over the 13-year period 39.9% of Thurston’s annual billings came from the Ontario Children’s Lawyer. This did not meet the near-exclusivity threshold and as a result Thurston was found to be an independent contractor rather than an employee or dependent contractor. The result of this is that Thurston was not entitled to common law notice which may have exceeded one year of pay in this case.
If you are dismissed this can have a significant affect on your rights. Both Employers and employees should take note of the recent decision in Cormier v. 1772887 Ontario Limited c.o.b. as St. Joseph Communications, 2019 ONSC 587 (Please note this decision was appealed up to the Court of Appeal whom dismissed the appeal and agreed with Justice Perell)
The dismissed plaintiff (“Cormier”) began working for St. Josephs in 1994 and there were arguments as to whether she was an Independent Contractor from 1994 until some point between 2004 and 2006.
The relevant issue then became whether for calculating reasonable notice Cormier was entitled to reasonable notice based on 23 years of service or based on 11-13 years of service. At paragraph 73 Justice Perell wrote the following:
“However, in my opinion, even if I had concluded that Ms. Cormier was an independent contractor from 1994 to 2004, it would have been wrong in principle to ignore these years of their relationship in determining the reasonable notice period. The court should take all of the circumstances into account and in the immediate case even if I had found Ms. Cormier to be an independent contractor, I would not have ignored those years of their relationship. In either case, considering all of the relevant factors and the particular facts of this case, I conclude that the reasonable notice period for Ms. Cormier at the time of her dismissal is twenty-one months.”
This decision could have a significant impact on the law going forward. It suggests that if an independent contractor becomes an employee, they may be entitled to common law reasonable notice based on the entire duration of their working relationship. Prior to this decision it was generally believed that you were only entitled to common law reasonable notice during your time as an employee. Independent contractor case law has been trending more and more in favour of the contractor.
Employers will want to take note of this development as it may impact their decisions going forward in regard to transitioning independent contractors. Legally valid termination clauses will need to be drafted in many cases to protect employers from this issue.
Independent contractors may want to consider transitioning into being employees as the pay off could be large for older more senior workers who have worked for a company long term.
One thing you need to carefully consider is why you want to hire an independent contractor. Is your goal simply to avoid termination pay, severance etc.? Are you trying to avoid having to pay employment benefits, Canada Pension Plan etc.?
If your goal is primarily to reduce termination pay or severance a properly inserted termination clause in an employment contract can restrict these amounts significantly. (Termination pay of up to 8 weeks and Severance capped at 26 weeks) This represents 1 week of termination pay per year of employment and 1 week of severance pay per year of employment if the employee has worked over 5 years for your company and your Ontario payroll is over 2.5 million annually.
If you still want to hire independent contractors that will legally be found to be independent contractors, you may wish to consider the following:
The above noted tasks are simply ideas. Doing all or none of these tasks will not ensure that they will be found to be an independent contractor. Ultimately, Judges will have to make that determination and you will need to speak with a lawyer in person about your company, issues, goals etc. All companies will have different requirements that will need to be met to best ensure independent contractors are legally independent contractors.
Trying to ensure someone is legally an independent contractor will often be unsuccessful. Most independent contractors are for the purposes of common law notice not actually independent contractors and will be entitled to a full severance package.
The situation is further complicated by the large range of risk tolerance of individuals and companies. There is probably a lower chance that a worker who thinks they are an independent contractor pursues a legal action for reasonable notice than an employee. However, there are the following significant downsides:
Decisions regarding independent contractors are extremely complex and require legal assistance in almost all cases. If you are an independent contractor or an employer and want to know more about your options, give us a call.