Chris and I are often asked by clients to advise on independent contractor agreements they wish to use for their senior salespeople or sales managers. Our advice is usually that such arrangements are fraught with danger as courts and tribunals will find in many cases that the person is both in fact and in law an employee and not an independent contractor notwithstanding what the written agreement says. A recent Ontario court decision highlights the potential dangers in misclassifying salespersons and sales managers as independent contractors.
In Rallis v Approval Team Inc., 2020 ONSC 4197 (CanLII) the Ontario Superior Court of Justice certified a class action law suit against a car dealer. The Plaintiff worked for Approval as a salesperson and then a sales manager until 2019 when he converted to an employee position. While an independent contractor, Approval did not pay the Plaintiff vacation pay, statutory holiday pay or overtime and did not make contributions for CPP or EI. The claim in the class action lawsuit is for all vacation pay, statutory holiday pay, overtime and CPP and EI contributions for all such persons engaged by Approval since 2018. [NOTE that in BC such a court claim for entitlements under the E S Act cannot be pursued in court: Macaraeg v. E Care Contact Centers Ltd., 2008 BCCA 182 (leave to appeal to SCC dismissed) but of course those claims can be pursued under the E S Act]
True independent contractors can be terminated at will without notice. But such true independent contractor relationships are going the way of the dodo bird. For example the courts will often find that persons or entities that are independent contractors and not employees can still be entitled to much the same benefits as an employee. Courts regularly find that reasonable notice of termination or pay in lieu will apply if the independent contractor is a “dependent contractor”, which is a judicial fiction of a hybrid position between a true employee and a true independent contractor: Marbry Distributors Ltd. v Avrecan Int. Inc, 1999 BCCA 172.
Not every dependent relationship will constitute a “dependent contractor”. For example the Ontario Court of Appeal recently found that a lawyer who provided legal services to the Office of the Children’s Lawyer (“OCL”) was not a dependent contractor notwithstanding that she earned approximately 40% of her income from the OCL: Thurston v Ontario (Children’s’ Lawyer), 2019 ONCA 640.
Under the B.C. Labour Relations Code “dependent contactors” are treated as employees with all the rights and protections of employees including the right to organize a work place.
Courts had traditionally awarded less notice of termination to a dependent contractor than an employee. However that trend is changing in favour of the dependent contractors. In a recent decision the B C Supreme Court held that a dependent contractor was entitled to the same notice that an employee in similar circumstances would be awarded. So a Senior Manager who was found to be a dependent contractor, aged 49 with 14 years of service received damages based on 15 months’ notice: Liebreich v Farmers N.A. et al, 2019 BCSC 1074.
Independent Contractors vs Employees
The distinction remains important as businesses can and do engage independent contractors.
The test was applied recently in a case involving someone who worked for a company that provided cleaning services to Starbucks stores in BC. In Farren v Elite Services Group Inc. 2020 BCSC 23 the issue was defined by the court as follows:
If Mr. Farren was an employee of Elite, the law of wrongful dismissal would govern the termination of his employment. In that case, he would be entitled to reasonable notice of termination or damages in lieu of such notice. The appropriate remedy would have to be determined in a subsequent proceeding. However, if Mr. Farren is an independent contractor, he is not entitled to the remedies he seeks. In that case, his claim should be dismissed: see Jacks v. Victoria Amateur Swimming Club, 2005 BCSC 778.
The court then set out the test for determining whether someone is an employee or an independent contractor:
Recently, in Lightstream Telecommunications Inc. v. Telecon Inc., 2018 BCSC 1940, this court set out a useful list of factors to determine whether a worker is an independent contractor, based on a review of relevant case law. Justice Russell grouped the factors as follows (at paras. 124-159) :
a) Level of worker control, including:
(1) Defendant’s control over plaintiff’s activities, including:
(a) Defendant’s power to select or not select the worker,
(b) Payment of wages,
(c) Defendant’s control over method of work, and
(d) Defendant’s right to suspend or dismiss plaintiff;
(2) Exclusive nature of the relationship;
(3) Plaintiff’s economic dependence on defendant; and
(4) Whether plaintiff could hire their own helpers.
b) Ownership of equipment or tools;
c) Opportunity for profit/loss;
d) Business integration, including:
(1) whether the plaintiff was a crucial element of the defendant’s business,
(2) whether the activity of the worker represents the defendant’s business,
(3) permanency and length of the relationship; and
(4) whether the parties rely on each other or closely co-ordinate conduct
Mr. Farren operated through his company, “101” which the court basically treated as one entity. The court applied these tests and found that Mr. Farren/101 was an independent contractor in relation to Elite. Mr. Farren’s action for wrongful dismissal was dismissed with costs to Elite.
Contrast this decision with a recent decision of the Ontario Superior Court of Justice in Marschall v Marel Contractors 2019 ONSC 4692 (CanII). Mr. Marschall worked as a drywaller for a large company and was terminated and sued for damages for wrongful dismissal. The Defendant argued that he was an independent contractor who was paid a fixed amount and collected GST. He could also work for others as long as it did not interfere with their employment.
In finding that Mr. Marschall was in fact and in law an employee the court noted:
Where an individual is providing services pursuant to an agreement, the fact that the individual is paid through his or her corporation is not determinative of whether an employment relationship exists with the individual (citations omitted).
 In 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59 (CanLII),  2 S.C.R. 983 at para. 47, the Supreme Court of Canada stated that there is no one conclusive test that can be universally applied to determine whether a person is an employee or independent contractor. However, it went on to set out what it considered to be a persuasive approach to the issue:
The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account. In making this determination, the level of control the employer has over the worker’s activities will always be a factor. However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her tasks.
It is one thing to find that the person you thought was an independent contractor was in fact and in law an employee or even a “dependent contractor” and that you are therefore liable to pay benefits, vacation pay, etc. But it is quite another thing to learn there are also serious risks that an error in properly characterizing the relationship might draw the attention of CRA and other taxing authorities. I have asked my colleague Kevin Scott, tax partner at Kane Shannon Weiler, to provide a brief summary of the potential tax liabilities. Kevin comments as follows:
As stated above, a business hiring a contractor who is later determined to be an employee can have significant tax implications for both parties. The employer will have to remit all unpaid payroll taxes, and might even be subject to penalties and interest. This re-characterization may also trigger a full-scale payroll audit by the CRA. Employees who have improperly claimed business expense deductions as contractors may also be liable. As such, it is vital to ensure that you minimize the risk of your contractors being reclassified by the CRA as employees.”
There are many businesses that engage true independent contractors. But more and more the courts and tribunals are finding that an individual, even if operating through her corporate entity, may not be a true independent contractor. If she is found to be an employee then serious negative consequences may follow. In many cases employers think they are doing themselves and the employee a favour by creating such a relationship and not making the appropriate deductions or contributions or otherwise failing to comply with employment standards laws and WCB requirements. The employee herself may benefit by taking certain deductions and reducing her income tax. The fact that the employee operates through a corporation is not definitive nor is the fact that there is a detailed contract that says the person is not an employee. The courts and tribunals will look at the substance of the relationship. If they find the person is an employee then liabilities will follow including the potential of being noticed by CRA.
So if you are thinking of hiring your sales manager who works only for you under your control as an independent contractor you may be asking for a huge financial headache including being on the CRA radar. At a minimum you should seek professional advice from your lawyer regarding the nature of the agreement that should be in place to offer the best protection against an adverse finding.