Law Times

PAGE 12 FOCUS March 1, 2010 • Law TiMes Bringing dependent contractors out of the shadows T BY JUDY VAN RHIJN For Law Times he courts have long acknowledged the exis- tence of an intermedi- ate position between employees and independent contractors, but the boundaries between the concepts are murky in the business trenches. When busi- ness owners fail to recognize the true nature of their rela- tionships, they leave them- selves open to a nasty surprise when termination time comes around. In December 2009, the On- tario Court of Appeal revisited the issue of employment and contractor categories in McKee v. Reid's Heritage Homes Ltd. Th e case confi rms the existence of the intermediate class as well as the nomenclature of the de- pendent 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 busi- nesses in certain circumstances. Th e unique circumstances of the McKee case involved a situ- ation where an individual was selling lots and homes. Eliza- beth McKee actually retained a number of subagents to pro- vide her services, and they got a cut of her fee. Th is arrange- ment continued for 18 years, a time when McKee worked exclusively for Reid's Heritage Homes. During a restructuring of the sales force, it off ered her a six-month engagement with a 14-day notice period. She re- jected the off er. Jeff Goodman of Heenan Blaikie LLP in Toronto says the McKee decision is critical because the court ultimately found her to be an employ- ee 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 signifi cant factor for courts to say that a person was running their own busi- ness," says Goodman. Stacey Ball of Ball & Alex- ander in Toronto agrees the case represents an important development in the law. "Th e worker had a private corpora- tion, 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 for- malistic arrangements that are relevant. Th e court is required to look at the true nature of the relationship." Th e decision also sets out the correct approach for deter- mining which category a work- er falls into. Goodman explains the test isn't about determining if someone is an employee, an independent contractor or a dependent contractor but rath- er whether a person is an em- ployee or a contractor. It's only once the court fi nds 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 depen- dent contractor category doesn't added some modern clarity to the topic. "It leaves no un- certainty of the entitlement of a dependent contractor Jeff Goodman says the approach in McKee will make it harder for employers to avoid the employee designation. make the employee class smaller. "It is carved out of the contrac- tor class in general, creating an enhanced class of people who are entitled to protection." Goodman says this ap- proach to the test will make it harder to escape the employee designation. "In the past, the concepts of employee and de- pendent contractor were pretty close to each other. Employers would try to avoid an employ- ment fi nding by saying that someone was a dependent con- tractor because that dictates the level of notice of termination if it hasn't been explicitly set out in the contract." Ross Wells at Gowling Laf- leur Henderson LLP's Kitch- ener offi ce believes the case for pay in lieu of reason- able notice," says Wells, who represented McKee. In the McKee case, it was critical to be a dependent contractor because her con- tract limited her to a very short notice period that clearly breached the Employ- ment Standards Act. Th at notice period was unenforce- able if she was an employee. An employee's notice entitle- ment 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 ques- tion as to how high a depen- dent 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. "Jus- tice 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." 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The subject- matter is wide-ranging and addresses issues such as: wrongful dismissal, fiduciary obligations, tort law and vicarious liability issues, remedies, constitutional issues, occupational health and safety, employment contracts, duty of good faith and fidelity and human rights. to be entitled to substantial notice because of her employ- ment status. "Th e court found that she was integral to the business, so she was found to be an employee," says Good- man. "Th e approach rolls back the Supreme Court decision of Sagaz [671122 Ontario Ltd. v. Sagaz Industries Canada Inc.], where the court had very un- kind 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. "Th e worker might be the sole distributor or it might be the only company that person has ever done business with," says Ball. "Th e key is the amount of exclusivity. Th ere must be complete or near complete and exclusive dependence." Th e concept of the depen- dent contractor isn't a well- known concept in the market- place. "A lot of employers don't have a clue," says Ball. "Th ey 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 prac- titioners who are outside the core employment law bar even though the intermediate cat- egory has been recognized for years. "It is a signifi cant cat- egory 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 liabil- ity for a year's worth of notice. A lot of employers would not bank on that." Wells believes the decision emphasizes the need for em- ployers to have written con- tracts with dependent contrac- tors. "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 no- tice provisions." McKee also fl ags the likeli- hood that it will be harder to appeal a fi nding that puts a worker in a particular category. "It's a question of discretion," says Goodman. "Th e court said it really wanted to show defer- ence to the trial judge's discre- tion. From a practical perspec- tive, you can expect that they're not going to interfere unless they really have to." LT LT0110 LT0301 For a 30-day, no-risk evaluation call: 1.800.565.6967 Canada Law Book is a Division of The Cartwright Group Ltd Prices subject to change without notice, to applicable taxes and shipping & handling. www.lawtimesnews.com Narrow 1/8 - 2X.indd 1 2/15/11 2:42:10 PM To advertise in an upcoming issue, contact our sales team: Karen Lorimer 905-713-4339 karen.lorimer@thomsonreuters.com Kimberlee Pascoe 905-713-4342 kimberlee.pascoe@thomsonreuters.com Stacey Reginald Ball "The most comprehensive text on employment law in Canada. It is carefully constructed and accurate."

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