Canada: Workers May Be Entitled To Notice On Termination Despite Being Classified As Independent Contractors

There are many advantages for a life science company hiring a worker as an "independent contractor" instead of an "employee". From a business point of view, for example, a business hiring an independent contractor does not have to withhold or remit employment insurance, pension plan and tax payroll deductions to the Canada Revenue Agency and there may be savings on the business' Workers' Compensation premiums. In addition, businesses may use "independent contractors" so that they can terminate the worker without having to provide notice of termination. However, despite being classified as an "independent contractor", courts are increasingly examining the relationship between the employer and the worker to determine whether the worker is an independent contractor, an employee or a dependent contractor.

The concept of a 'dependent contractor' was recognized previously by the Ontario Court of Appeal in McKee v Reid's Heritage Homes Ltd. In that case the Court of Appeal found that employment relationships exist on a continuum; with the employer/employee relationship, at one end of the continuum, and independent contractors at the other end. Between those two points, lies a third intermediate category of relationship, now termed dependent contractors. Like independent contractors, workers falling into this third intermediate category usually have their own businesses and they do not have the traditional hallmarks of employment, such as health benefits or vacation entitlements, however, workers in this third intermediate category may be entitled to notice on termination. One of the key principles the courts look at in determining whether the worker is a dependent contractor is the exclusivity of the relationship between the parties.

Recently, in Keenan v. Canac Kitchens Ltd., the Ontario Court of Appeal heard an appeal from Canac Kitchens who had terminated two independent contractors without notice. The Keenans were independent contractors who had signed independent contractor agreements that provided that they were to devote "fulltime and attention" to Canac Kitchens. The Keenans worked almost exclusively for Canac Kitchens until 2009, when they were told that Canac Kitchens was shutting down. Canac Kitchens gave the Keenans nothing on termination - no notice, no pay in lieu of notice, and none of the usual statutory entitlements. After Canac Kitchens ended the relationship in March 2009, the Keenans brought an action against Canac Kitchens. At trial, the trial judge looked at the following principles in determining whether the Keenans were dependent contractors:

1. Whether or not the worker is limited exclusively to the service of the principal;

2. Whether or not the worker 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;

3. Whether or not the worker has an investment or interest in what are characterized as the tools relating to his service;

4. Whether or not the worker has undertaken any risks in the business sense, or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission; and

5. Whether or not the activity of the agent is part of the business organization of the principal for which he works.

The trial judge found that all five of those now well-known principles favoured a finding that the Keenans were dependent contractors and they were entitled to reasonable notice on termination. The trial judge awarded the Keenans damages of 26 months' notice.

On appeal, after examining the history of the relationship between the Keenans and Canac Kitchens, the Court of Appeal upheld the lower court's finding of exclusivity on the basis that the Keenans were economically dependent on Canac Kitchens for over 30 years and the substantial majority of the work performed by the Keenans was performed for Canac Kitchens. In addition, the Court of Appeal upheld the lower court decision finding the notice period of 26 months was reasonable based on the Keenans' age, length of service, and their positions even though such notice is generally only awarded in exceptional circumstances.

Courts are increasingly examining the relationship between the employer and the worker to determine whether the worker is an independent contractor, an employee or a dependent contractor. This decision makes it clear that merely calling someone an independent contractor (even if that term is used in a written agreement) or merely having a separate corporation through which the person is paid does not mean that the person will be treated as an independent contractor in court. Courts and tribunals will conduct their own assessment as to whether a worker is an employee, an independent contractor or a dependent contractor. If the worker is determined to be a dependent contractor, the worker may be entitled to reasonable notice or pay in lieu thereof similar to that of an employee.

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