Canada: To Have Your Cake And Eat It Too? Incorporation Does Not Necessarily Affect Employee Status Under The Act Respecting Labour Standards

Can a person who sets up a company in order to receive his or her salary be deemed as an employee?

On February 3, 2023, in Jobidon v. Centre Dentaire Patrick Canonne Inc., 2023 QCTAT 479, the Administrative Labour Tribunal ("TAT"), presided by Administrative Judge Yves Lemieux, ruled affirmatively on this question.

This decision is a reminder that one's fiscal status does not automatically have an impact on his qualification as an "employee" under the Act respecting Labour Standards ("LSA").

The Facts

The Plaintiff is a dental surgeon who had worked for the Defendant, Centre Dentaire Patrick Cannone inc. for several years. During the course of his employment, he incorporated a company under his name. The Plaintiff's professional fees were then paid out to his company.

In 2019, the owner of the clinic advised the Plaintiff that his services would no longer be required.

The Plaintiff filed a complaint for dismissal without just and sufficient cause under the LSA, which Judge Lemieux granted. Since the Employer did not allege just and sufficient cause for the termination, the only issue in dispute was the Plaintiff's status as an employee.

The Tribunal's Decision

The judge states that, because the LSA is of public order, the parties cannot derogate from it by defining their own contractual relationship. The main consideration remains the reality underlining the parties' relationship.

The Court therefore had to determine whether the Plaintiff was legally subordinated to the Employer by analyzing all the relevant circumstances. According to Judge Lemieux, the absence of source deductions and the fact that the Plaintiff's fees were paid to his company did not prevent him from being recognized as an employee for the purposes of the LSA. In fact, the interpretation of the terms "employee" and "entrepreneur" under fiscal legislation does not correspond to the definition of these terms under the LSA.

The judge distinguished this factual situation from the one in the Dazé case¹, where the Plaintiff had incorporated a company through which delivery drivers were hired and paid out with the revenues received from the company he claimed to be his employer.

Commentary

In his dissent in Services financiers FBN v. Chaumont², Justice Rochon wrote:

« [18] On ne peut avoir le beurre et l'argent du beurre.

[19] Celui qui, pour des raisons financières, fiscales ou légales, décide de son plein gré de constituer une société par actions, ne peut « lorsque la bise fut venue » troquer sa veste corporative pour le manteau du salarié et réclamer la protection que la loi n'accorde qu'à ces derniers. »

Despite these comments, the majority judges in this case were of the opinion that the corporate veil must be lifted when exceptional circumstances demonstrate employee status. A common example of "exceptional circumstances" is when incorporation is imposed by the employer as a loophole to avoid any legal obligations towards employees³.

The Jobidon case is notable in that Judge Lemieux did not apply the "exceptional circumstances" test and instead proceeded with a general analysis of all the relevant circumstances.

Key points

Businesses must remain sensitive to the following reality: contracts defined as service, subcontracting, or consulting agreements, as well as the terms used in these agreements, such as "independent worker" or "self-employed worker", cannot prevent the LSA's application if an individual is in fact treated as an employee and if there exists a relationship of subordination with the employer.

Furthermore, an employee's incorporation, his fiscal status as a self-employed worker or the absence of any deductions at the source are not decisive factors when determining whether an individual is an employee.

Every case has its own particularities, but, generally speaking, incorporation will prevent an individual from being classified as an employee in circumstances where the personal performance of the work by the employee is not an essential consideration when entering into the contractual agreement (i.e. when the company proceeds to hire other individuals to perform the work).

Conversely, where the legal relationship suggests a relationship of subordination and the personal performance of the work by the specific individual is a primary consideration in the conclusion of the contract, incorporation will not automatically circumvent the application of the LSA.

If there is any ambiguity as to the nature of the legal relationship between the parties, caution is therefore advised. Businesses can quickly find themselves in breach of their obligations under the LSA and may be exposed to recourses under this law if the legal relationship with a self-employed worker is not properly defined.

Footnotes

1.Dazé v. Messageries dynamiques, 1990 CanLII 3522 (QCCA);

2.Services financiers FBN v. Chaumont, 2003 CanLII 24474 (QCCA);

3.Dicom Express inc. v. Paiement, 2009 QCCA 611, paras 20 à 21; Conseillers en informatique d'affaires CIA inc. v. 4108647 Canada inc., 2012 QCCA 535, par. 36; Burrier Pincombe v. Immunotec inc., 2011 QCCS 5090, par. 70

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.