United States: Highest Court In Canada Says Substance, Not Form, Will Determine Independent Contractor Or Employee Status

A recent Supreme Court of Canada (SCC) decision considered whether a franchisee who entered into a franchise agreement with a franchisor was an employee or an independent contractor. The fact-specific case, Modern Cleaning Concept Inc. v. Comité paritaire de l'entretien d'édifices publics se la region de Quebec (the "Committee") ("Modern Cleaning"), 2019 SCC 28, involves a Quebec statute and its unique definition of "employee," and a tripartite franchise model that is uncommon in Canada. Nonetheless, this decision from Canada's highest court provides guidance on the factors to be considered in determining employee or independent contractor status.

The SCC's guidance is particularly valuable at this time given the modern trend away from traditional forms of employment and the movement to engaging independent contractors, consultants, and freelancers who often claim improper characterization as independent contractors. Upon making this claim, they argue that they are in fact employees entitled to the protections and entitlements afforded to employees, including those under relevant employment standards legislation (e.g., unpaid wages, overtime, leaves of absence, vacation with pay, termination notice or pay in lieu), Employment Insurance and Canada Pension Plan premiums, and common law damages for termination without cause.

Background

Modern Cleaning Concepts ("Modern") provides office cleaning and maintenance services to businesses in Quebec. After entering into master cleaning contracts with its clients, Modern assigns the contracts for specific locations to franchisees who perform the work. Francis Bourque ("Bourque") had a part-time cleaning business and became Modern's franchisee in 2014.

The Franchise Agreement

The franchise agreement between Modern and Bourque provided:

  • As franchisee, Bourque would have "complete control over the management of his operations, which involves a business risk as in any other business, for which the franchisor is in no way a guarantor";
  • Bourque would be assigned cleaning contracts;
  • Bourque would be an independent contractor;
  • Modern would be indemnified for any and all suits, claims and other demands related to a failure to comply with any obligation in the agreement;
  • Modern could cancel Bourque's cleaning contracts on "mere notice";
  • Bourque would perform cleaning services exclusively through the franchise relationship;
  • Bourque would not compete with Modern;
  • Bourque would use his own tools and equipment;
  • Bourque would identify himself as a member of the Modern network in relation to any business activity;
  • Bourque would immediately report any complaints he received from clients to Modern;
  • Any of Bourque's employees deemed to be unacceptable to either Modern or one of its clients would be let go;
  • Modern's representatives could perform quality control checks at any time without prior notice;
  • Any new cleaning opportunities were required to be reported to Modern so that Modern could negotiate the contracts;
  • Modern would bill the clients in Bourque's name; and
  • Modern would pay Bourque by direct deposit after deducting the various amounts Bourque owed Modern (up to 43% of Bourque's revenue).

Modern assigned Bourque to one branch of the SAQ, a government corporation, and four bank branches; Bourque had limited interactions with these clients. Bourque terminated the franchise agreement after five months, reportedly over lack of profits and his inability to develop the business as he wished.

The Collective Agreement, the Statute that Governs it and the Committee that Oversees Compliance

The Decree respecting building service employers in the Quebec region ("Decree") is a collective agreement that covers the provision of cleaning services in public buildings in Quebec. The Act respecting collective agreement decrees, CQLR. C. D-2 ("Act") governs the Decree. The Act includes the following definitions:

"Professional employer": an employer who has in his employ one or more employees covered by the scope of application of a decree.

"Employee": any apprentice, unskilled labourer or workman, skilled workman, journeyman, artisan, clerk or employee, working individually or in a crew or in partnership.

The Committee is responsible for overseeing compliance with the Decree and can take action arising from the Decree on behalf of employees. It commenced proceedings against Modern on behalf of Bourque arguing that the Decree applied to Modern's relationship with him because he was an "employee" within the meaning of the Act and accordingly Bourque was entitled to $9,219 in unpaid wages and benefits.

The Issue

The issue was whether the Decree applied to the relationship between Modern and Bourque because Bourque was an "employee" within the meaning of the Act. More specifically, since "artisan" is included in the definition of "employee" in the Act, the question was whether Bourque was an "artisan."

The Trial Decision

Although the trial judge noted that some factors suggested that Bourque was an employee, he ultimately concluded that Bourque was an independent contractor. In arriving at this decision, he was influenced by the fact that Bourque's purpose in entering into the franchise agreement was to expand his own cleaning business, and by the language of the franchise agreement.

The Decision of the Court of Appeal

The Court of Appeal overturned the trial judge, noting that he misapprehended the tripartite nature of the relationship, and made an error in failing to consider that when Modern assigned the cleaning contracts to Bourque, Modern remained contractually liable to its clients. The Court of Appeal decided that Bourque was an employee.

The SCC's Analysis

The majority of the SCC began by noting that the definitions of "professional employer" and "employee" must be given a large and liberal interpretation in light of the remedial powers of the Act and the Decree. It then stated that the fact that the franchise agreement identified Bourque as a franchisee was not determinative because the actual and substantive nature of the parties' relationship must be assessed.

The SCC noted further that the Decree may apply to relationships not governed by employment contracts as clearly demonstrated by the inclusion of "artisan" in the definition of "employee"; what is important is that the individual is in an "employee" relationship within the meaning of the Act.

The SCC then indicated that to distinguish between an "artisan" and an independent contractor, one must conduct a highly contextual and fact-specific inquiry into the nature of the relationship to determine which party bears the business risk and corresponding ability to make a profit; if it is the worker, then the worker is an independent contractor; if not, the worker is an "employee" for purposes of the Act. The SCC explained that a worker who assumes some degree of risk relating to their working conditions, as most workers do, does not automatically assume the business risk.

The SCC emphasized that the following two factors were central to the analysis in this particular case:

The Tripartite Business Arrangement

The test was to be applied in the context of a tripartite business arrangement, which involved three parties:

  • The client requesting the cleaning services;
  • Modern, which guaranteed the quality and provision of the services; and
  • The franchisee, who actually performed the services.

The Imperfect Assignment

The assignment of the cleaning contract made by Modern to Bourque was an "imperfect assignment" according to Quebec law:

  • In a perfect (true) assignment, the assignor transfers the rights and obligations it has under the contract to an assignee. The assignor is released from the assigned contract, and the assignee is bound as if it were the original contracting party.
  • In an imperfect assignment, the assignor is not released from its obligations under the contract and a new contracting party is added. The other party to the assigned contract can pursue both the assignor and the assignee for the performance of the contract's obligations.

For the SCC, the "imperfect assignment" and tripartite business model made it clear that Modern assumed the business risk and ability to make a profit: a direct contractual link existed between Modern and its client, placing the business risk of contractual non-performance on Modern. Modern limited this liability due to Bourque's conduct by placing controls on Bourque through the franchise agreement, which restricted his ability to organize and expand his business and make a profit. Bourque's payments from Modern were more like a salary than business revenue.

In light of this, the SCC concluded that Bourque was an "artisan" and therefore an "employee," and Modern was a "professional employer" under the Act. Bourque was entitled to the wages and benefits claimed by the Committee.

Bottom Line for Employers and Franchisors

Employers and franchisors should not lose sight of the unique characteristics of this case: Bourque was found to be an employee based on the definition of employee in the Act, a Quebec statute; he might not have been found to be an employee under another statute.

Furthermore, the case involved a tripartite contractual model. With regard to Canadian franchise arrangements in particular, as noted by the SCC in its decision, they are not generally based on the tripartite model in this case; in a typical franchise model the franchisee bears the risk and would be considered an independent contractor. Nonetheless, even in a typical franchise model, franchisors should pay close attention to how much control they exert over their franchisees because if enough control is exerted, the franchisee may be considered an employee even absent a tripartite arrangement.

Regardless of the factors above, the guidelines set out in Modern Cleaning for proper characterization of workers are highly relevant to all employers across the country. The SCC has left no doubt that how a worker is identified in an agreement will not be the factor that will determine how the worker should be characterized; the determination will be based on substance, not form. The test for proper characterization involves conducting a highly contextual and fact-specific inquiry into the nature of the relationship to determine which party bears the business risk and corresponding ability to make a profit; if it is the worker, then the worker is an independent contractor. Otherwise, the worker is an employee. Employers are encouraged to conduct such an analysis of their business models to ensure that they have properly characterized their workers.

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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