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For a variety of reasons, more and more employees want to create
companies to provide their services as contractors, rather than
employees. Such services will often be identical to those that were
provided when the individual was an employee. Subject to a tax,
employment insurance or Canada Pension Plan audit, that may be fine
while the individual is providing services. But it can go very
wrong at the end of the relationship, with many contractors
claiming the pay in lieu of notice and severance pay they would
have received had they been employees. Things may be changing
in Quebec, however. In Conseillers en informatique d'affaires CIA
("CIA") Inc. v. 4108647 Canada
Inc. (PDF - Available only in French), the Court of
Appeal of Québec recently said that employees who
voluntarily choose to create a company in order to enter into a
contract for services with their former employer will
not be entitled to notice of termination or pay in
lieu thereof, unless the contract provides otherwise.
Facts
In 2002, Solution and Integration of New Concept S.I.N.C. Inc.
("SINC") acquired the company for which
Ms. Cohen, a senior IT manager, worked for 15 years. Ms. Cohen
asked SINC if she could provide her services through a company that
she would create for this purpose. SINC agreed and a consulting
agreement (the "Agreement") was
signed.
Subsequent to the signature of the Agreement and the creation of
Ms. Cohen's company (the "Company"),
her daily routine remained the same:
she continued to work exclusively on projects for SINC despite
a clause in the Agreement providing that the services rendered by
the Company and Ms. Cohen were non-exclusive;
she did not provide her own work location or equipment, despite
a clause in the Agreement stating that she had to; and
she had no independent control over her work.
In 2004, CIA acquired SINC. CIA approved the renewal of the
Agreement with Ms. Cohen's company. In 2007, CIA advised Ms.
Cohen it was terminating the Agreement without notice.
Ms. Cohen and the Company claimed 18 months of consultant fees,
based on Ms. Cohen and the Company's combined total years of
"service" with CIA and its predecessors.
Trial Decision
Despite the fact that the trial judge confirmed the Agreement
could not be qualified as an employment contract because the
services were provided by a company rather than by an individual,
he nevertheless determined that when the parties to a contract for
services have been in a long-term employment relationship prior to
the contract and that the only element that differentiates their
new contractual relationship is the vehicle through which the
services are provided, it may be presumed that the company will be,
like an employee, entitled to reasonable notice of termination of
the services. According to the trial judge, the substantive rights
of the parties that existed under the employment contract continued
to apply.
CIA argued that Ms. Cohen, who voluntarily chose this
arrangement for fiscal reasons, should not "have her cake and
it eat too" and appealed.
Court of Appeal of Québec
The Court of Appeal confirmed that when a service provider is a
company, it is only under exceptional circumstances that the court
will find that the agreement is an employment contract. This may be
the case if it is shown that the company is a "smoke
screen" the employer uses to sidestep its
obligations.
Such was not the case here. Since Ms. Cohen had freely chosen
for her own benefit to provide her services through a company as a
contractor, no exceptional circumstances warranted departing from
the rule. The Court of Appeal explained further that the law does
not allow transferring the rules applicable to an employment
contract to a contract for services.
Ultimately, Ms. Cohen was entitled only to 30 days notice, as
was specifically set out in the services agreement.
Distinction With Other Provinces
This decision is welcomed in Quebec as it clarifies that if an
employee chooses to modify his or her status in order to render
services through a corporation, even though little else has
changed, the employee forfeits all entitlements he or she would
have had as an employee at termination.
But that is not necessarily the case throughout the rest of the
country. In other provinces, courts may take into account the
degree of economic dependency that exists between the parties.
Where the contractor works exclusively, or nearly exclusively, for
the company, the individual may be deemed to be an employee or
dependent contractor, and thus entitled to reasonable notice.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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