Canada: Most Equity Partners In Partnerships Are Not Employees

Supreme Court of Canada releases decision in McCormick v. Fasken Martineau DuMoulin LLP, 2014 SCC 39

On May 22, 2014, the Supreme Court of Canada (the "Court") found that Mr. McCormick, a partner with an ownership stake in a law firm, was not an employee of the law firm, and therefore not protected by the BC Human Rights Code (the "Code"). The Court directed human rights tribunals to focus their analysis on "control and dependency" in determining whether an employment relationship exists. The Court does not preclude the possibility that an individual may be both a partner in a partnership, and an employee of that partnership for the purposes of the Code. However, that finding was not appropriate based on the factual context in McCormick. The decision is another example of the Court favouring a contextual approach that assesses the substance of a relationship, rather than its formal legal structure. In adopting that contextual approach, the Court continues to show a preference for flexibility over rigid rules, at the expense of certainty.

The Court's decision has implications for all partnerships in Canada, and generally with respect to the test for whether an individual should be considered an "employee" for the purpose of the Code (for example, with respect to independent contractor relationships).

Case Background: The Test for Employee Status

Mr. McCormick became an equity partner in a law firm in 1979. In the 1980s, the equity partners voted to adopt a provision in their Partnership Agreement whereby equity partners were to retire as equity partners at the end of the year in which they turned 65. As an equity partner at that time, Mr. McCormick was entitled to vote on that mandatory retirement policy. He then benefitted from that policy for a number of years. However, when Mr. McCormick attained the age of 64, he took the position that the policy amounted to discrimination based on age, contrary to the Code. The law firm denied that the policy was contrary to the Code, arguing in part that Mr. McCormick, as an equity partner, could not also be an employee of the partnership; without an employment relationship, the Code did not apply.

Both the BC Human Rights Tribunal ("BCHRT") and the BC Supreme Court ("BCSC") agreed that Mr. McCormick was an employee for the purposes of the Code, even though he was a partner with an ownership stake in the firm. The BC Court of Appeal ("BCCA") disagreed, finding that at law, an equity partner could never also be an employee of the partnership.

It's All About Control and Dependency

The Court found that Mr. McCormick was not an employee of the partnership (and therefore not protected by the Code). However, Madam Justice Abella, writing for a unanimous court, rejected the partnership-exclusion rule adopted by the BCCA, and instead found that each relationship, irrespective of its formal legal structure, must be considered on its own facts. The key factors in that analysis, the Court decided, are control and dependency.

Mr. McCormick had sufficient control over the relationship between himself and the partnership such that he was not an employee of the partnership. The indicia of control included Mr. McCormick's right to participate in management, vote for the Board of the partnership, stand for election to the Board of partners, have accounts rendered, not be subject to discipline or dismissal, share in the capital of the partnership, and to not be expelled without a special resolution of the other partners. The Court also found that Mr. McCormick was not dependent because his remuneration was made in accordance with his ownership interest and he was in common enterprise with the other partners, working for his own benefit. Mr. McCormick at one time had sufficient control such that he had an opportunity to participate in the implementation of the mandatory retirement policy.

Even though the Court's decision was made based on the nature of the relationship between Mr. McCormick and his partnership, the decision may have broader implications. In a curious bit of reasoning, the Court declared that the control-dependency test has always been at the core of the test used by the BCHRT. In fact, the BCHRT has consistently applied a four-part test considering utilization, control, financial burden, and remedial purpose. The Court also declared that the control-dependency test lies at the core of the test applied by the Ontario Labour Relations Board, which uses a seven-part test. In so declaring, the Court referred to the existing tests applied by tribunals across the country as useful "checklists" and somewhat dismissively as "unweighted taxonomies." It remains to be seen what impact, if any, this decision will have on what degree the control-dependency test is now adopted in various administrative contexts, or even in common law courts, to determine employment status.

Finally, the Court rejected the approach adopted by the BCCA, and found that while a partner could also be an employee of a partnership, such a contextual matrix would occur only where, on the facts, an individual was a partner in name only, without material control.

Lessons for Employers

The case has a number of lessons for all businesses, in particular those structured as a partnership. As a practical matter, it may be comforting to see the Court rein in the liberal definition of the term employee as applied by the BCHRT and BCSC. What remains unclear is whether tests applied by other tribunals or the common law courts will shift towards a control-dependency test.

The Court's decision is likely limited in its scope. In Ontario, for example, the applicable human rights legislation prohibits discrimination in contracts. Accordingly, a partnership in Ontario is prohibited from having terms in a partnership agreement (which is essentially a contract between the partners) which discriminate on a prohibited ground of discrimination (e.g. age, sex, colour, etc.). Further, the Court noted that s. 22(1) of the BC Partnership Act requires that all partners must act with the "... utmost fairness and good faith towards other members of the firm in the business of the firm." The Court mused that s. 22(1) might therefore prevent discriminatory behavior amongst partners in a partnership, although probably not the kind of discrimination alleged by Mr. McCormick.

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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