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Dependent Contractors and Reasonable Notice

June 28, 2010 CCH Labour Notes and Lang Michener LLP InBrief Summer 2010
A recent case decided in the Ontario Court of Appeal reaffirms that, between the status of "employee" and that of "independent contractor," is the lesser known status of "dependent contractor." McKee v. Reid's Heritage Homes Ltd . (" McKee ") defines anew the grey area between the two better known categories. From a practical viewpoint, this case means that one must be very careful in establishing independent contractor agreements to ensure that not only do they avoid the pitfalls of employment agreements (particularly notice of termination requirements), but also that they avoid the liability for notice of termination that attaches to the "dependent contractor" relationship.  

Facts

Briefly, the plaintiff McKee arranged for her company, Nu-Home Consultant Services ("Nu-Home"), to enter into an agreement providing that the defendant, Reid's Heritage Homes, supply a fixed number of newly built homes in Guelph for McKee to advertise and sell.
 
McKee's company would charge a fee of $2,500 for each home that she sold. There was an exclusivity clause in the agreement which limited Nu-Home to selling homes only for the defendant company or related companies. There was also a mutual 30-day termination clause in the agreement.
 
McKee, through her company, sold the original allotment of homes and many more over the following years. The corporate vehicle operated by the plaintiff changed names and the fee structure changed over the years, and the plaintiff hired her own employees to enable her company to carry out its responsibility under the contract.
 
Eventually, the original controlling mind of Reid Heritage Homes died and his son-in-law came in as a new broom ready to sweep everything clean. The new man advised McKee that she and her employees would have to become employees of Reid's under a new agreement. But McKee refused to enter into the new arrangement and negotiations broke down. She then sued for wrongful dismissal, characterizing her relationship with the defendant as an employment contract.

Employee vs. Independent Contractor

By way of background, it is useful to look at the extremes on either side of the "dependent contractor" status. The distinction between the two arose largely as a result of cases in which vicarious liability was raised as an issue when an injured party would bring an action against a corporation for damage caused directly by one of the corporation's agents. The courts would look at the question of whether the agent was an employee, thus making the employer vicariously liable for his or her actions, or an independent contractor, in which case no vicarious liability would be found.
 
The test to determine on which side any particular contractual relationship stood was first defined in an English case [ Regina v. Walker ] decided in the mid-19 th century. The "control test" that originated in this case was adopted by the Supreme Court of Canada in 1978 (in Hôpital Notre-Dame de l'Espérance v. Laurent ), and described "the essential criterion of employer-employee relations [as] the right to give orders and instructions to the employee regarding the manner in which to carry out his work."
 
Ultimately, there is no one test that can apply in all situations, which is the conclusion drawn by MacGuigan J.A. in Wiebe Door Services Ltd. v. M.N.R. :
 
[I]t is exceedingly doubtful whether the search for a formula in the nature of a single test for identifying a contract of service any longer serves a useful purpose…. The most that can profitably be done is to examine all the possible factors which have been referred to in these cases as bearing on the nature of the relationship between the parties concerned. Clearly not all of these factors will be relevant in all cases, or have the same weight in all cases. Equally clearly no magic formula can be propounded for determining which factors should, in any given case, be treated as the determining ones.  

If Not an Independent Contractor, Then Perhaps a Dependent Contractor  

The recent McKee decision firmly places "dependent contractor" status outside of the "employee" category. And the essence of the dependency consists in determining the degree of exclusivity owed by the worker.
 
The court is involved in a two-step process that involves first examining the relationship between the parties to determine whether the worker is an employee or a contractor. The factor of exclusivity weighs in favour of characterizing the relationship as one of employment, but it is only one of several factors.
 
The second step is only necessary if it is determined that a contract for services, not an employment relation, exists. In this second step, exclusivity becomes the determinative factor as to whether the worker is to be considered an independent or dependent contractor.As the Court concludes in this case:
 
…exclusivity might be a "hallmark" of the dependent contractor category vis-à-vis the broader category of contractors. However, it 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.
 
The policy behind this distinction is to provide some protection to workers who are technically contractors, but whose position of economic dependence and vulnerability leaves them exposedin a way that neither employees nor true independent contractors are.
 
In the McKee decision, the Court endorsed the five principles reviewed in Belton v. Liberty Insurance Co. of Canada and applied them to the facts of the case, to determine that the plaintiff was indeed an employee, not a dependent contractor. Those factors are:
 
  1. Whether or not the agent was limited exclusively to the service of the principal;
  2. Whether or not the agent is subject to the control of the principal, not only as to the product sold, but also as to when, where and how it is sold;
  3. Whether or not the agent has an investment or interest in what are characterized as the "tools" relating to his service;
  4. Whether or not the agent has undertaken any risk in the business sense or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission;
  5. Whether or not the activity of the agent is part of the business organization of the principal for which he works. In other words, whose business is it?
Despite the finding that Ms. McKee was an employee, this case does signal the Court's continuing belief in the in-between category of dependent contractor. The case does indicate that the dependent contractor relationship, although not an employment agreement, would still be subject to reasonable notice provisions, not unlike those applied routinely by the Courts to true employment contracts. 

Practical Application

What does this mean for businesses whose intention is to engage contractors to perform services while avoiding liability for the common law and Employment Standards Act minimum notice of termination requirements?
 
Most importantly, it means that parties will have to be very careful in structuring their relationships, such that they embody the hallmarks of a contract for services. It is well known that the Courts do not simply examine the written agreement between the parties, but also the realities of their actual relationship to one another in determining whether that relationship is an employment contract or some other kind of arrangement. Not only that, the parties will have to carefully examine and structure the exclusivity of their agreement, such that the party performing the work will be at liberty, and have a practical opportunity, to perform work for other entities not connected to the original contracting party.
 
If such a structuring is simply not possible, then the party supplying the work will have to plan for the contingency that, some time in the future, it may be held liable by a court to pay damages for reasonable notice when the agreement comes to an unplanned end.
   
This article appeared in the Lang Michener LLP InBrief Summer 2010 .
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