United States: Ontario, Canada Companies Beware: Class Action Lawsuits Alleging Worker Misclassification Are On The Rise

It appears there is a movement afoot in Ontario to change behavior around the classification of employees as independent contractors.  Beginning in 2015, we began to see a number of class action lawsuits that allege misclassification and claim significant monetary liability. They include claims for employee entitlements under the Employment Standards Act, 2000 (ESA), including minimum wage, overtime pay, vacation pay, public holiday pay, and premium pay; claims for Canada Pension Plan and Employment Insurance contributions owed to employees; claims for adverse tax consequences sustained by employees as a result of the alleged misclassification; and claims for general, punitive, aggravated, and exemplary damages.

In addition to creating a risk of significant financial exposure for the defendant companies, these lawsuits often result in damage to their reputations in the media.  Media attention also has the effect of encouraging others who believe they have been incorrectly classified to jump on the class action bandwagon. 

The jurisprudence in these cases has not yet developed beyond the legal issues to be decided at the certification stage.  If the courts find in favour of the plaintiffs when the substantive issues are finally litigated, employers that are misclassifying employees as independent contractors could be vulnerable to significant financial liability.  In 2019, we expect to have at least one decision on the merits to look to for guidance. 

Class Action Proceedings in Ontario Alleging the Misclassification of Employees as Independent Contractors

The class action proceedings in Ontario alleging the misclassification of employees as independent contractors suggest that it is not just start-up and gig economy employees who are alleging misclassification.  The lawsuits indicate that established companies with significant workforces are not immune to such claims.   

To date, there have been five class action lawsuits in Ontario alleging the misclassification of employees as independent contractors.  The first lawsuit was filed in the spring of 2015, and the most recent lawsuit was filed in the fall of 2018.  We suspect there may be more to come.  Individuals covered by the classes in these lawsuits vary widely.  They include door-to-door sales agents, food delivery drivers, lawyers, teachers, and television production workers.  In addition to claims for benefits and protections of the ESA, the quantum of damages claimed for the classes in these lawsuits range from $30 million to $200 million, in claims for some or all of general, punitive, aggravated, and exemplary damages. Two of the class actions have already been certified.  A summary judgment motion is scheduled to be heard in June 2019 with respect to one of them, and the decision rendered  will be the first on the merits.  At this time, neither a trial date nor a motion date has been set for the other certified class action.  The remaining class action lawsuits are putative class actions, meaning that it remains to be seen if the courts will decide that they merit certification.  A certification motion was heard in February 2019 regarding one of the putative class actions; however the court's decision has not been released.          

Distinguishing Between an Independent Contractor and an Employee

The courts have developed tests that examine the substance of the relationship between the worker and the business for the purpose of determining whether the worker is an employee or an independent contractor.  A single factor will not determine the nature of the relationship; a court will look at the nature of the relationship in its totality.  The following are some of the characteristics that will be considered when the class actions discussed above are considered on their merits:

  • Does the business exercise control over the worker's activities (where, when, and how the work is performed)?  If so, the worker is more likely to be an employee.
  • Does the worker provide his own tools and equipment?  If so, the worker is more likely to be an independent contractor.
  • Has the worker taken a financial risk and is there opportunity to share in the profit?  If so, the worker is more likely to be an independent contractor.
  • Is the worker integrated into the business' operations (does he perform essential functions for the business)?  If so, the worker is more likely to be an employee.
  • Is the worker's ability to perform work for others restricted? If so, the worker is more likely to be an employee.
  • Does the worker have the power to delegate work to others or hire helpers?  If so, the worker is more likely to be an independent contractor.

Although the title of the parties' agreement and its language may suggest that the intention was to create an independent contractor agreement, a court will weigh the factors listed above to determine whether the substance of the relationship is consistent with that intention.

Who Has the Onus of Proving that a Worker is Not an Employee?

Effective November 27, 2017, Bill 148, Fair Workplaces, Better Jobs Act, 2017 amended the ESA by placing the burden on the employer to prove that a worker is not an employee for the purposes of the ESA.  This reversal of the onus did not last long; when a new government was elected, it  announced that pursuant to Bill 47, Making Ontario Open for Business Act, the burden of proving that a worker is an employee would revert back to the employee effective January 1, 2019. 

What Is the Bottom Line for Companies in Ontario?

Companies in Ontario that engage workers to provide services may be vulnerable to significant liability if the workers are inappropriately treated as independent contractors rather than employees.  To avoid liability in such cases, the companies must not assume that a court would consider their view of the nature of the relationship determinative of the issue.  Titling a hiring agreement an "Independent Contractor Agreement" will not be persuasive if the tests the courts have established cannot be satisfied in favour of an independent contractor finding.  To help avoid liability for misclassification, when companies enter into relationships with workers, they should actively ensure that the arrangement satisfies the criteria the courts have identified as indicative of an independent contractor arrangement; the language of the hiring agreement should be consistent with such a finding.  In addition, as part of a risk assessment exercise, companies that already have workers who are classified as independent contractors should proactively review both the workers' agreements and the substantive nature of their relationship.  The prompt correction of an incorrect classification may help a company avoid or diminish significant financial liability.  Finally, as we expect at least one class action proceeding in 2019 to substantively determine whether employees were misclassified as independent contractors, we strongly encourage Ontario companies with workers who have been designated independent contractors to watch vigilantly as these developments unfold. 

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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