Even with a signed agreement, courts may still find independent contractors are actually employees
The question of whether an individual is an employee or an independent contractor is an important one to consider when it comes to wrongful dismissal.
If he is an independent contractor, then he has no right to claim damages for wrongful dismissal because there is no employment relationship upon which to sue. But a court may still decide an independent contractor is entitled to a period of advance notice of termination of the relationship in certain circumstances.
The inability to sue for wrongful dismissal is something employers should welcome. Employers should therefore be careful when creating independent contracting relationships in order to ensure they do not become de facto employees. The Ontario Superior Court decision of Belton v. Liberty Mutual considered whether a group of insurance agents were independent contractors or employees.
The plaintiffs in Belton were sales agents for Prudential Insurance Company of Canada. These sales agents were restricted to selling Prudential life insurance products and property and casualty insurance of a related company, Prudential of America General Insurance Company (PAGIC).
In the spring of 1996 London Life acquired Prudential. As a result the plaintiffs were required to devote their energies to selling London Life’s insurance products, but they could continue selling PAGIC’s property and casualty insurance. In early 1997 PAGIC was acquired by Liberty Mutual Insurance Company.
In January 1999 Liberty introduced a new compensation agreement for its sales agents. The plaintiffs refused to sign the new agreement, taking the position that Liberty did not have the right to change the commission structure. The deadline for signing the new agreement came and went.
As a result the plaintiffs were summarily dismissed for failing to sign the new agreement. The plaintiffs sued Liberty for wrongful dismissal.
The first issue the court considered was whether the plaintiffs were employees or independent contractors. One stumbling block for the plaintiffs was they had signed representative agreements with London Life and PAGIC acknowledging they were independent contractors and not employees.
Despite those agreements, the court found the plaintiffs were in an employment relationship with Liberty. The court followed a long line of case law which holds that the determination of whether an individual is an employee or an independent contractor depends on the circumstances of each case and not on the terms of a contract. The court considered the following factors:
•whether or not the agent was limited exclusively to the service of the principal;
•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;
•whether or not the agent has an investment or interest in what are characterized as the “tools” relating to his service;
•whether or not the agent has undertaken any risk in the business or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission; and
•whether or not the activity of the agent is part of the business organization of the principal for which he works.
The court was persuaded that Liberty exercised sufficient control and direction over the plaintiffs to conclude they were in an employer and employee relationship. The factors which supported this finding included the following:
•they reported to managers at Liberty;
•they were required to devote their full time to the interests of their principal and they had to sell specified insurance products;
•they were provided with office facilities, telephones and faxes; and
•they had no ownership over their book of business and no legal or other entitlement to their customers.
Having found the sales agents to be employees, the court then turned its mind to whether they were wrongfully dismissed from their employment with Liberty.
To determine whether the sales agents were wrongfully dismissed, the court had to resolve the issue of whether Liberty could unilaterally impose changes to the existing compensation structure.
In order to answer that question, the court had regard to the contract which Prudential intended to impose on the plaintiffs as well as the prior contracts entered into by the plaintiffs with Prudential and London Life. Each of those contracts contained clauses which permitted changes to be made to the compensation structure provided that reasonable notice of such changes was given to them.
In this case, Liberty gave 90 days’ notice it was going to introduce new changes to the commission schedule, a period of time the court concluded was reasonable in the circumstances.
Since the plaintiffs were aware the failure to sign the new agreement would result in their employment being terminated, the court held Liberty had cause to dismiss the plaintiffs from their employment for failing to sign the new agreement.
Lessons from the Belton case
Employers must be careful to avoid creating de facto employment relationships in order to protect themselves from possible wrongful dismissal claims from staff they thought were independent contractors.
As the Belton case illustrates, even where a contract describes a person as an independent contractor, courts will look beyond the terms of the contract to consider the reality of the relationship. An independent contractor is a person who controls his own work, takes a financial risk of profit or loss and often provides his own tools of the trade.
Therefore courts will focus on the employer’s right to control the employee’s work, including where, when and how it is done. To avoid creating a de facto employment relationship, employers must avoid dictating the person’s method and hours of work and should permit the person autonomy in how and when the work is accomplished.
For more information see:
• Belton v. Liberty Mutual (2002), 20 C.C.E.L. (3d) 262.
Mark Mason is a lawyer with Goodman and Carr LLP in Toronto. He can be reached at [email protected].
If he is an independent contractor, then he has no right to claim damages for wrongful dismissal because there is no employment relationship upon which to sue. But a court may still decide an independent contractor is entitled to a period of advance notice of termination of the relationship in certain circumstances.
The inability to sue for wrongful dismissal is something employers should welcome. Employers should therefore be careful when creating independent contracting relationships in order to ensure they do not become de facto employees. The Ontario Superior Court decision of Belton v. Liberty Mutual considered whether a group of insurance agents were independent contractors or employees.
The plaintiffs in Belton were sales agents for Prudential Insurance Company of Canada. These sales agents were restricted to selling Prudential life insurance products and property and casualty insurance of a related company, Prudential of America General Insurance Company (PAGIC).
In the spring of 1996 London Life acquired Prudential. As a result the plaintiffs were required to devote their energies to selling London Life’s insurance products, but they could continue selling PAGIC’s property and casualty insurance. In early 1997 PAGIC was acquired by Liberty Mutual Insurance Company.
In January 1999 Liberty introduced a new compensation agreement for its sales agents. The plaintiffs refused to sign the new agreement, taking the position that Liberty did not have the right to change the commission structure. The deadline for signing the new agreement came and went.
As a result the plaintiffs were summarily dismissed for failing to sign the new agreement. The plaintiffs sued Liberty for wrongful dismissal.
The first issue the court considered was whether the plaintiffs were employees or independent contractors. One stumbling block for the plaintiffs was they had signed representative agreements with London Life and PAGIC acknowledging they were independent contractors and not employees.
Despite those agreements, the court found the plaintiffs were in an employment relationship with Liberty. The court followed a long line of case law which holds that the determination of whether an individual is an employee or an independent contractor depends on the circumstances of each case and not on the terms of a contract. The court considered the following factors:
•whether or not the agent was limited exclusively to the service of the principal;
•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;
•whether or not the agent has an investment or interest in what are characterized as the “tools” relating to his service;
•whether or not the agent has undertaken any risk in the business or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission; and
•whether or not the activity of the agent is part of the business organization of the principal for which he works.
The court was persuaded that Liberty exercised sufficient control and direction over the plaintiffs to conclude they were in an employer and employee relationship. The factors which supported this finding included the following:
•they reported to managers at Liberty;
•they were required to devote their full time to the interests of their principal and they had to sell specified insurance products;
•they were provided with office facilities, telephones and faxes; and
•they had no ownership over their book of business and no legal or other entitlement to their customers.
Having found the sales agents to be employees, the court then turned its mind to whether they were wrongfully dismissed from their employment with Liberty.
To determine whether the sales agents were wrongfully dismissed, the court had to resolve the issue of whether Liberty could unilaterally impose changes to the existing compensation structure.
In order to answer that question, the court had regard to the contract which Prudential intended to impose on the plaintiffs as well as the prior contracts entered into by the plaintiffs with Prudential and London Life. Each of those contracts contained clauses which permitted changes to be made to the compensation structure provided that reasonable notice of such changes was given to them.
In this case, Liberty gave 90 days’ notice it was going to introduce new changes to the commission schedule, a period of time the court concluded was reasonable in the circumstances.
Since the plaintiffs were aware the failure to sign the new agreement would result in their employment being terminated, the court held Liberty had cause to dismiss the plaintiffs from their employment for failing to sign the new agreement.
Lessons from the Belton case
Employers must be careful to avoid creating de facto employment relationships in order to protect themselves from possible wrongful dismissal claims from staff they thought were independent contractors.
As the Belton case illustrates, even where a contract describes a person as an independent contractor, courts will look beyond the terms of the contract to consider the reality of the relationship. An independent contractor is a person who controls his own work, takes a financial risk of profit or loss and often provides his own tools of the trade.
Therefore courts will focus on the employer’s right to control the employee’s work, including where, when and how it is done. To avoid creating a de facto employment relationship, employers must avoid dictating the person’s method and hours of work and should permit the person autonomy in how and when the work is accomplished.
For more information see:
• Belton v. Liberty Mutual (2002), 20 C.C.E.L. (3d) 262.
Mark Mason is a lawyer with Goodman and Carr LLP in Toronto. He can be reached at [email protected].
