The ever-increasing liability of mischaracterizing employees as contractors

Legislative changes and case law are increasingly lowering the boom on employers who ignore the reality of relationships with certain contractors
By Alexander Kowal
|Canadian Employment Law Today|Last Updated: 08/28/2018

Many employers use contractors as a way to cut costs and streamline administration, as they have fewer legal responsibilities towards independent contractors as they would with employees. However, in their enthusiasm to avoid employment standards-related considerations, some employers don’t realize that the employment relationship they have with certain contractors may not be what they want or say it is. More and more, legislatures and courts are looking to protect workers who may have a closer relationship than employers think.

While the liability associated with misclassifying workers as contractors has existed for a long time, courts and legislators have taken steps to expand the scope of this liability, all culminating in the British Columbia Supreme Court’s recent decision in Pasche v. MDE Enterprises Ltd.  

One of the first steps was creating the common law construct of a dependent contractor: a hybrid relationship that was part contractor and part employee, with the consequence that reasonable notice of termination was required to terminate such a relationship. Seminal cases related to dependent contractors include Jacks v. Victoria Amateur Swimming Club, McKee v. Reid’s Heritage Homes Ltd., and, more recently,  Keenan v. Canac Kitchens and Glimhagen v. GWR Resources Inc. As identified by the court in Glimhagen, the key indicia of a dependent contractor relationship include:

“1. Whether the agent was largely limited exclusively to the service of the principal.

  2. Whether the agent was subject to the control of the principal, not only as to the product sold but also as to when, where and how it was sold.

  3. Whether the agent had an investment in or interest in the tools necessary to perform his service for the principal.

  4. Whether by performing his duties the agent undertook risk of loss or possibility of profit apart from his fixed rate remuneration.

  5. Whether the agent’s activity was part of the principal’s business organization — in other words ‘whose business was it?’

  6. Whether the relationship was long standing — the more permanent the term of service the more dependent the contractor.

  7. Whether the parties relied on one another and closely co-ordinated their conduct.

In applying these factors, if the relationship “bears more resemblance to, or is akin to, an employer/employee status the relationship will be treated as an employee/employer relationship for the purpose of implying an obligation to provide reasonable notice.”

Using these indicia, the courts in Canac Kitchens and Glimhagen awarded significant reasonable notice awards to workers who were misclassified as independent contractors, a status of workers who are typically not eligible for common law reasonable notice — 26 months reasonable notice in the Canac Kitchens decision and 12 months in the Glimhagen decision.

Legislative changes

The second key step has been legislating protections for dependent contractors or penalties associated with misclassifying employees as independent contractors. Namely, both Ontario and Alberta have implemented changes that create potentially significant liability for those companies who misclassify workers. Through its Fair and Family-Friendly Workplaces Act, Alberta changed the definition of employee as of Jan. 1, 2018, to include dependent contractors who work for one employer. The change, in essence, provides contractors the right to unionize and bargain collectively. Similarly, in Ontario, through the government’s Fair Workplaces, Better Jobs Act, employers are expressly prohibited from misclassifying employees as independent contractors, with penalties and compliance orders to be levied if they do.

The most recent and succinct analysis related to this intermediary designation can be found in the Pasche decision. The worker worked for the employer, MDE, as a sheet metal estimator. He commenced work in 1997 and continued working until he was terminated in 2015. During his time at MDE, the worker was paid an hourly wage, invoiced MDE plus GST for hours worked — which generally exceeded 40 hours per week. The worker consistently worked overtime hours without written approval — required for MDE employees —  was paid straight time for all hours and was not required to submit timesheets —again, required for MDE employees. The worker set his own hours and also worked from home 20 to 30 per cent of the time, a privilege not afforded to MDE employees. The worker worked exclusively for MDE, although this was not a requirement imposed on him by the company. MDE provided the worker with a workspace, desk, desktop computer, filing cabinet and access to a phone; however he used his own laptop, with his own estimation software and paid for his own parking spot near MDE’s office. The worker worked with MDE staff on a daily basis and was listed along with MDE staff on the company’s printed phone lists, promotional materials and had business cards indicating he was a staff member of MDE. During his 18-year tenure, the worker reported directly to MDE’s owner and he considered him his boss. He did not receive any minimum statutory entitlements, including vacation pay, public holiday pay or sick pay, nor were any statutory deductions deducted from his earnings.

The worker claimed his earnings as business income on his tax returns and deducted various business expenses during the entirety of his tenure. In 2013, the Canada Revenue Agency (CRA) contacted MDE to advise that it was performing an audit of the worker’s earnings from 2012. Following their review, the CRA ruled that the worker was a ‘self-employed worker.’  Prior to his termination due to the closing of MDE’s sheet metal department, the worker was never disciplined nor was he subject to any formal performance review.

Following his termination, upon which no reasonable notice was provided, the worker sued for wrongful dismissal. Ultimately, because of the lack of control MDE had over the worker it was determined that he was not an employee. However, the court’s main determination related to whether or not, based upon the factors set out in Glimhagen, he was a dependent contractor — a relationship more akin to employment and thus entitled to notice — or an independent contractor, who would not be entitled to same. Ultimately, the court concluded that the worker was closer to that of an employee than an independent contractor based upon his economic dependence and his longevity with MDE. Specifically, the factors the court noted were:

“1. The plaintiff (the worker) worked exclusively for the defendant (MDE).

  2. The plaintiff was minimally supervised by the defendant in terms of his day-to-day work and had a relatively high degree of autonomy.

  3. The plaintiff invested in some of his tools but others were provided by the defendant.

  4. The plaintiff undertook no risk of loss or possibility of profit apart from his hourly wage. Although he made more money if he brought in more business, all of his work was in the service of MDE.

  5. All of the plaintiff’s activity was part of the principal’s business organization and he was integrated with it.

  6. The relationship was long-standing in that it spanned 18 years.

  7. The plaintiff relied entirely on the defendant for his livelihood.”

The court summarized its finding by stating: “The quintessential definition of an independent contractor is someone who is in business for themselves. Weighing all of the above factors, this cannot be said of Mr. Pasche. He worked exclusively for MDE over a period of 18 years. On all the evidence, including the length and permanency of Mr. Pasche’s arrangement, the exclusivity of the relationship, and the dependency of the plaintiff on the defendant, I conclude that the relationship was more akin to an employer/employee relationship than that of an independent contractor.”

Based upon its finding that the worker was a dependent contractor, the court awarded the worker 13 months’ notice.

The Pasche decision, along with the decisions before it and recent legislative changes, signals to employers yet again that there is significant risk to treating workers as independent contractors who are not. However, much of the liability that is attracted by this mischaracterization can be minimized where the worker is incorporated, where the company pays the worker’s corporation — as opposed to the worker directly — where the company has conferred the right onto the worker to work elsewhere — and perhaps even encourages it — and where there is an enforceable agreement between the parties that provides for notice of termination that meets minimum employment standards requirements should an employment relationship be found. That being said, legislative rights and penalties are more difficult to avoid regardless of the steps taken by a company who misclassifies a worker.

For more information see:

• Pasche v. MDE Enterprises Ltd., 2018 CarswellBC 1047 (B.C. S.C.).

• Jacks v. Victoria Amateur Swimming Club, 2005 CarswellBC 1286 (B.C. S.C.).

• McKee v. Reid’s Heritage Homes Ltd., 2009 CarswellOnt 8053 (Ont. C.A.).

• Keenan v. Canac Kitchens Ltd., 2015 CarswellOnt 2322 (Ont. S.C.J.).

• Glimhagen v. GWR Resources Inc., 2017 CarswellBC 1238 (B.C. S.C.).

Alex Kowal is a legal advisor with e2r® in Toronto. He can be reached at (416) 867-9155 or akowal@e2rsolutions.com.

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