2010-01-15
OCA says 'dependent contractors' entitled to reasonable notice
The Ontario Court of Appeal has explicitly recognized for the first time the existence of "dependent contractors" in a ruling which lawyers predict may spur more claims from terminated workers who aren't employees.

On Dec.23 2009, Justices James MacPherson, Janet Simmons and Harry LaForme dismissed the appeal of Reid's Heritage Home Ltd. from an award of 18-months' pay that plaintiff Elizabeth McKee won at trial in 2008.

The panel held that Superior Court Justice John Belleghem was well within his discretion to find that the former in-house sales agent for the defendant home builder was an 18-year employee - not an independent or even "dependent," contractor.

As such the 64-year-old employee was entitled to pay in lieu of reasonable notice - which the trial judge assessed at 18 months' pay, or about $400,000 plus interest and costs.

Although Ontario's top court disposed of the case by affirming McKee's status as an employee, the panel's extensive obiter dicta explicitly affirm what various trial judgments across the country have held over the years - that there exists an intermediate category of "dependent contractors" who are neither employees (entitled to reasonable notice) nor independent contractors (not entitled to reasonable notice).

Counsel told The Lawyers Weekly the Court of Appeal has assisted plaintiffs by affirming that dependent contractors are entitled to reasonable notice.

While such reasonable notice is apt to be less than for fully fledged employees, how much "reduced" is likely to be a legal battleground, predicts Ross Wells of Gowling Lafleur Henderson LLP in Waterloo Ont., counsel for the defendant.

"I think [the judgement] is important to clarify the idea we accepted, which was that dependent contractors are entitled to some sort of notice or pay in lieu, but doesn't help us to understand what [amount] that notice is," Wells told The Lawyers Weekly. "I would think that most dependent contractors who are not subject to written contracts of engagement would be making claims for notice."

Wells said there won't be an application to the Supreme Court for leave to the Supreme Court for leave to appeal.

Counsel for the plaintiff, Kirk Stevens of Toronto's Lerners, said the case once again illustrates the perils for companies who fail to clarify in writing their relationships with their workers.

"Parties engaging others in contractor relationships... are going to have to be careful to have written contracts because they will not realize that the relationship may be found to be one of dependency and give rise to an entitlement to some sort of reasonable notice," he suggested.

Employment law practitioner Stuart Rudner of Miller Thomson LLP in Markham, Ont. noted that many business people and human resources professionals remain unaware that their so-called independent contractors are actually "employees" in the eyes of the law, even when those "contractors" are paid through a corporation and work primarily on commission.

"The courts have made it very clear that they will look behind the wording of an agreement and the terms that the parties use to define their relationship in order to ascertain the reality of the situation," remarked Rudner. "Many organizations expose themselves to significant risks because they fail to understand these issues and do not obtain appropriate legal advice."

Justice MacPherson reasoned that "it only makes sense" to carve the dependent contractor category out of the broader existing independent contractor category, in light of concerns to safeguard workers who are formally "contractors" but who remain economically vulnerable.

"The case law's evolution demonstrates the existence of an intermediate category, defined by economic dependency in the work relationship, requiring, inter alia, some reasonable notice for termination," he wrote.

The appeal court ruled "that an intermediate category exists, which consists, at least, of those non-employment work relationships that exhibit a certain minimum economic dependency, which may be demonstrated by complete or near-complete exclusivity. Workers in this category are known as 'dependent contractors' and they are owed reasonable notice upon termination."

Justice MacPherson said dependent contractors are not a species of employee. Rather they are "a 'carve-out' from the non-employment category."

He advised that in order to figure out whether a person is an employee or a dependent contractor, one must apply the same legal principles one uses to distinguish between employees and independent contractors.

The Sagaz/Belton analysis asks five questions. Was the worker" toiling exclusively for the principal; controlled by the principal; invested in, or an owner of, the tools relating to his or her service; assuming risk or expecting profit associated with delivery of his or her service, as distinct from a fixed payment; and part of the business organization of the principal, i.e. whose business is it?

"The proper initial step is to determine whether a worker is a contractor or an employee, for which the Sagaz/Belton analysis...controls," Justice MacPherson explained. "Under that analysis, the exclusivity of the worker is listed as a factor of weighing in favour of the employee category."

The second step - which is reached only if one concludes in the first step that the worker is a contractor - determines whether the contractor is independent or dependent. In the second step, "a worker's exclusivity is determinative, as it demonstrates economic dependence," Justice MacPherson said. "Therefore, exclusivity might be a 'hallmark' if the dependent contractor category vis-a-vis the broader category of contractors. However, [exclusivity] continues also as a factor in determining whether the worker is not a contractor at all, but rather an employee, in the first-step analysis."



Source: Schmitz, C., "OCA says 'dependent contractors' entitled to reasonable notice" The Lawyers Weekly (January 15th, 2010).
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