Dependent Contractors And Reasonable Notice Of Termination

May 12, 2015

By Brian Babcock

Substance usually defeats form in law, and wrongful dismissal law is no exception. Calling someone a contractor, but treating them similar to an employee, may trigger obligations of reasonable notice of termination.

Thus, it comes as no surprise that in a recent trial decision, an Ontario Superior Court judge decided that the Plaintiffs, a husband and wife, were entitled to reasonable notice of the termination of their contract, even though it was intentionally structured not to be an employment contract.

The Keenans had worked as foremen supervising installation for Canac Kitchens for many years. In 1987, Canac decided that the installation portion of their business would no longer be done by employees, but that contractors would be hired.

The Plaintiffs agreed to the new arrangement, under which they arranged the installers as sub-contractors, paid in accordance with rates set by Canac. The Keenans, as Delivery and Installation Leaders, would, as before, also be paid on a piece work basis for each box or unit installed. However, the amount paid would be increased to reflect the fact that the Keenans were being paid gross, without deductions for Unemployment InsuranceCanada Pension Plan, or Income Tax. The Keenans became responsible for damage to cabinets while in transit, and were expected to obtain insurance to cover such liability.

The installers would provide their own trucks and would pick up cabinets from Canac and deliver them to job sites, where they would be installed.

The Keenans were expected to devote their full time and attention to Canac’s business, a fact that later became central to the finding that they were not independent, even though in reality, they did carry on some amount of independent business, mostly after Canac’s business declined so that it did not keep them busy full time.

The Keenans considered themselves to be loyal employees of Canac. They enjoyed employee discounts. They wore shirts with company logos. They maintained their office at the Canac premises. They had Canac business cards. Mr. Keenan received a signet ring for 20 years of loyal service. To the outside world, and in particular, to Canac’s customers, the Keenans were Canac’s representatives.

This arrangement continued until 2009, when Canac went out of business.

The Keenans, suffering the loss of their livelihood, sued. The judge applied a 2009 Court of Appeal decision which established that in between independent contractors and employees, a third category exists, known as dependent contractors. Like employees, dependent contractors are entitled to reasonable notice of termination of the contract.

Five principles apply to distinguish employees from independent contractors, and the judge applied them to decide whether or not the Keenans were dependent contractors (that is, do they look more like employees or independent contractors?):

  1. Whether or not the agent was limited exclusively to the service of the principal?
  2. Whether or not the agent was subject to the control of the principal not only as to the product sold, but also as to when, where, and how it was sold?
  3. Whether or not the agent had an investment or interest in what was characterized as the tools relating to his/her service?
  4. Whether or not the agent had undertaken any risks in the business sense, or, alternatively, had any expectation of profit associated with the delivery of his/her service as distinct from a fixed commission?
  5. Whether or not the activity of the agent was part of the business organization of the principal for which he/she worked. In other words, whose business is it?

Although some of the facts suggested that the Keenans were independent contractors, that last question was crucial to the judge deciding that the Keenans were dependent contractors – they were an integral part of Canac’s business and, to the outside world, they appeared to be part of the Canac operation. Canac set the rates paid to installers, established service standards, dealt with any customer complaints, and controlled the work flow. The Keenans had a degree of risk, but limited prospect to control their profits since it was all piece work, and Canac controlled that.

Other than eliminating source deductions, little had changed by the Keenans becoming contractors rather than employees – and that change was for Canac’s benefit.

The Keenans received 26 months’ pay in lieu of notice – the maximum available in law, reflecting their long service.

If you own or operate a business in Thunder Bay, you must make a choice. If you want the benefits of control, you run the risk of responsibility for reasonable notice upon termination of the relationship, whether it is employment or contractual. To control your exposure, you may wish to enter into written employment contracts, or contracts with independent contractors. These contracts may contain negotiated terms on notice of termination. If properly drafted, courts will uphold notice provisions.

If you find yourself in the Keenan’s position, before you simply accept your termination, this case illustrates the benefits of seeing a lawyer for advice.