Court Decision Confirms that Employment Relationships are Based on the Facts of Each Case
As an employment lawyers, I am often asked to help determine whether an individual is an “employee” or “independent contractor.” This distinction is very important for employers as the consequences of misclassification can be significant. Specifically, if a worker is wrongly classified as an independent contractor when they are truly an employee, an employer may face financial liabilities relating to:
(i) paying the employee minimum standards entitlements under the Employment Standards Act, 2000 (ESA), including unpaid wages, overtime pay, vacation pay and holiday pay
(ii) wrongful dismissal damages (i.e., pay in lieu of notice under common law)
(iii) Payroll deductions and withholdings, including Canada Pension Plan (CPP) and Employment Insurance (EI) remittances
(v) income taxes (as well as penalties and interest for failure to make income tax withholdings and failure to issue a T4 Statement of Remuneration
A typical employment dispute involves an employee bring a wrongful dismissal (or constructive dismissal claim) following a termination of the working relationship, with the objective of obtaining a financial severance package. In response, an employer will argue the employee is not entitled to bring a wrongful dismissal claim or obtain a severance package because they are independent contractor (not an employee).
What is an Independent Contractor in Ontario?
An independent contractor is a worker who is in business for themselves. Therefore, unlike a regular employee, the worker is not covered by Ontario employment law protections under the ESA and common law, such as:
- notice of termination (or termination pay)
- severance package
- health benefits and RRSP (pension plan) continuation
- severance package (or termination package)
- minimum wage
- vacation pay
- overtime pay
How to Tell if Someone is an Independent Contractor
Under Ontario employment law, an individual may be considered an independent contractor (not an employee) if, for example:
- the business they work for can unilaterally end the individual’s contract for services, but cannot discipline the individual
- the worker:
- has the opportunity to make a profit and has a risk of losing money from the work
- determines how, when or where the work is performed
- has freedom to decide whether to subcontract some of the work to a third-party
Example
Tammy works as a customer service representative for a sales business. She is required to work Monday to Friday from 8:30 a.m. to 4:30 p.m. in the business’s office. She is given access to a cell phone and laptop to do her work. She is paid $29.00 per hour. She has signed an employment contract with a termination clause allowing the company to discipline her for poor performance or even terminate her employment. Ironically, the employment contract states that she is an independent contractor and therefore does not receive vacation pay, overtime pay, public holiday pay or notice of termination (severance package).
At some point, the company decides to replace Tammy with another work. In turn, Tammy speaks with an employment lawyer in Toronto, and concludes she might actually be an employee and is therefore entitled to a severance package following her termination of employment (as well as previously unpaid overtime pay, vacation pay and public holiday pay). So, she decides to hire an employment lawyer to obtain a severance package and, following negotiations, both parties agree that this could be a case of employee misclassification and it would be better off from the employer to reach a settlement. In fact, even though the employment contract states she is an independent contractor, the facts show she was an employee all along. Why?
The following case is a good illustration of the legal test the courts will use to determine if a worker is an employee or independent contractor.
Beach Place Ventures Ltd. v. Employment Standards Tribunal
In this case, the employment dispute was whether three taxi drivers were employees or independent contractors for purposes of employment standards legislation. Specifically, the taxi drivers filed individual complaints with the Ministry of Labour claiming that the employers violate the ESA by failing to pay regular wages, overtime, statutory holiday pay and vacation pay.
The employers’ business structure created confusion in the employment relationships. For instance, the three drivers did not own their vehicles or taxi licence (they were rented or leased). In fact, the taxi company owned and operated the taxis and licences, and also provided administrative, accounting, and dispatch services to the taxi drivers.
Despite the lease and licence structure of the business, the Director found the taxi drivers to be employees for the purposes of the ESA.
Court Decision
In its decision, the court ultimately found that the taxi drivers actually employees despite the fact that they leased the taxis and licences. In particular, it concluded that the relationship is best determined by looking at the circumstances of each case, and agreed with the Supreme Court of Canada’s decision in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59 when it stated:
“there is no one conclusive test which can be universally applied to determine whether a person is an employee or an independent contractor” and the “relative weight of each [factor] will depend on the particular facts and circumstances of the case.” In Sagaz, the SCC concluded that the central question is whether the person is performing services as a “person in business on his own account.”
Factors to Determine the Working Relationship: Employee or Independent Contractor
While there is no universal test to determine whether a worker is an employee or an independent contractor, there are a set of factors the caselaw recognizes can be used a worker is an employee (and not an independent contractor):
- whether the company provides the worker the equipment, tools and supplies required to do the job
- the worker cannot hire their own employees or sub-contractors
- the worker has little to no opportunity for profit or financial risk of loss
- the company sets the worker’s hours of work or schedule
- the work is not allowed to provide services at the same time for other companies or competitors
- the worker is on payroll and is paid without deductions for EI and CP (they are not an incorporated business, do not invoice the company, remit HST)
- the worker is hired indefinitely (not for a set time or specific project)
- the worker has not signed a contract or agreement or state state the worker is an independent contractor
While a worker does not have to satisfy all of the above criteria to be considered an employee or independent contractor, the more factors are present in the analysis, the more likely a court will find they are an employee and not an independent contractor .
Lessons Learned
This case is a helpful reminder that employment relationships are determined based on the facts or context of each case, and there is no “one-size-fits-all” approach or test that can be used. It is important for employers to speak with a top employment lawyer to decide whether to hire a worker as an employee or independent contractor in order to avoid the significant consequences of employee misclassification. The potential costs associated with misclassification of employees can be significant, including include having to provide an employee with damages for wrongful dismissal (severance package).
Call Employment Lawyer Toronto for Help
If you were terminated from your employment with or without severance package, call today to discuss your options. As an employment law firm in Toronto, Bune Law has reviewed many severance packages and are skilled at negotiating improvements. You will review and get guidance on your severance package before you agree to sign any termination documents, and help ensure that your severance package is fair and reasonable.