Employee, Independent Contractor… or Dependent Contractor?
In the area of employment law, some of the most common disputes employment lawyers deal with often involve debating legal rules that are constantly changing as a result of conflicting court decisions. The main reason for this is because employment law is a complicated assortment of statute, case law and contract law.
In fact, some of the typical issues that are the most difficult for employment lawyers to deal with include: “Is the termination clause in my employment contractor legal and enforceable?” or “Did my employer have just cause to terminate my employment without prior notice or a severance package?” and “Am I an employee or an independent contractor?” As most readers may have heard before, the correct answer is usually: “It depends”.
Why?
Because every case is decided based on its own unique set of facts and circumstances. And when it comes to determining whether a worker is a truly a contractor as opposed to an employee, the reality is no different: it will depend on the nature and scope of the work relationship between the worker and the company to whom he/she provides services.
Why is it important to determine if a worker is an employee rather than an independent contractor? Well, from the worker’s perspective, being considered an “employee” affords certain legal benefits and protections that independent contractors do not have, including basic rights under the Employment Standards Act (e.g., minimum wage, overtime pay and vacation pay); the ability to apply for employment insurance benefits (EI); and the right to receive prior notice of termination from the employer before their job is terminated (including termination pay and severance pay).
Test for Determining Employee vs. Independent Contractor
As discussed before, there are many factors that a court will consider to determine if a worker is a contractor or employee, and no one specific factor will decide the issue. However, the key theme of the analysis is determining who exerts control over the work relationship: the worker or the company?
A complete assessment of a work relationship involves a court considering the following key factors:
Control – does the company have the ability, authority or right to control the actions of the worker, such as the amount of pay, nature, location and management of the work performed? In other words, how much control does the company have over the worker’s activities? Does the worker provide their own tools and equipment, or are they provided by the company? Can the worker sub-contract some of the work or hire assistants?
Economic Reality – in performing the work for the company, is the worker able to make a profit or suffer a loss (e.g., financial risk)? Is there a written agreement governing the work relationship?
Organization/Integration – what is the worker’s role within an organization as a whole? Are they treated similar to the company’s regular employees? Do they receive salary or benefits, as would a regular employee?
One of the leading cases in Ontario commonly relied on for the legal standard is McKee v. Reid’s Heritage Homes Ltd., where the Court of Appeal identified the factors to apply to determine whether a contractor is a dependent or independent contractor:
(a) Whether or not the agent was limited exclusively to the service of the principal;
(b) 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;
(c) Whether or not the agent has an investment or interest in what are characterized as the “tools” relating to his service;
(d) 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; and
(e) 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?
As these factors demonstrate, it is not difficult to imagine a case where a worker meets many of the conditions that suggest they are not an actual employee of the company, and to some degree actually operate somewhat like a contractor in their own right. However, it is precisely in these cases where the worker is usually “economically dependent” on the company. That is, the worker relies heavily (if not completely) on the services it provides to that one company to earn a living, and is therefore financially vulnerable.
It is precisely this financial vulnerability that some workers have (even if the worker is is better considered a contractor, rather than an employee) that the courts have said is necessary to protect. As a result, they established a new category called a “Dependent Contractor,” where the worker enjoys the same legal protections under employment law. Most importantly, a Dependent Contractor will have the same rights of an employee to minimum wage, vacation and notice of termination/severance pay if the job ends.
However, to meet the high standard of “economic dependency” that is required to prove that a worker is a Dependent Contractor, the worker’s earnings must come “exclusively” (or “nearly-completely exclusively”) from that one company alone . In practical terms, it means the worker earns “substantially more than 50%” of their total income from one company.
Case Example
Jack Ganz Consulting Ltd. v. Recipe Unlimited Corporation, 2020 ONSC 3319
In a recent decision, the court applied the above test and found that, in the unique facts of that case, the worker was actually an independent contractor. Among its analysis, the court emphasized the following:
- the worker was not economically dependent on the company, since he was not required to provide his services “exclusively” to that one company alone (he was at liberty to also provide services to other companies at the same time)
- the worker was free to hire his own employees/contractors to do all (or part) of the services he was contracted to provide to the company
- the worker had other significant sources of income other than from his work with this company
- there was little “indicia of control,” since the company did not decide what methods the worker employed in doing his job, did not require him to provide reports, did not provide direction or guidance over his work, and did not require him to follow a specific dress code, code of conduct or discipline him
- the worker specifically chose to be hired as an independent contractor, and not as an employee
For these reasons, the court concluded the worker and the company did not have the kind of permanent, exclusive and dependent relationship that would be necessary to find that he was an employee or dependent contractor. Therefore, he was not entitled to receive common law notice of termination of the work relationship.
Contact
If you are an Ontario worker (or company) seeking legal advice from an employment lawyer on whether you are in an employment relationship or independent contractor arrangement, please contact Bune Law at 647-822-5492 or fill out the contact form on the side.
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