Canadian Lawyer InHouse

Dec/Jan 2011

Legal news and trends for Canadian in-house counsel and c-suite executives

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By Henry Dinsdale and Jeff Goodman Peeling back the label Courts look to substance over form in contractor relationships. cially in the sales and distribution side of the business. Recent Canadian case law increases the risks affiliated with this type of arrangement by suggesting many contractors are, in fact, employees entitled to reasonable notice of termina- tion. In McKee v. Reid's Heritage Homes Ltd., the Ontario Court of Appeal exam- ined the distinctions between employees, dependent contractors, and independ- ent contractors. The court narrowed the circumstances in which an individual could be found to be a dependent con- tractor and expanded those in which an individual would be found to be an employee. This is significant because a dependent contractor can agree to a written contract for little or no notice of termination whereas an employee must receive at least statutory notice of termination and any attempt to con- tract out of that right will result in the employee being entitled to receive rea- sonable notice of termination. F The contractor agreement Elizabeth McKee entered into an agree- ment with Reid's Heritage Homes to sell houses on behalf of her business. The agreement provided for the following: • Reid's would supply 69 homes for McKee to advertise and sell in exchange for a commission. • McKee was prohibited from providing services to any company that was not controlled by Reid's. Either party could terminate the agree- ment on 30 days of notice, a common oreign companies operating their businesses on a small scale in Canada often use contractors in lieu of hiring Canadian employees, espe- notice clause in contractor agreements. After McKee sold the first 69 homes, Reid's continued providing homes for her to sell. Over time, McKee hired, trained, and managed her own sub-agents with- out Reid's involvement. The relationship continued for 18 years until Reid's told McKee she and her sub-agents would have to work as direct employees. McKee declined employment on the terms offered and sued for wrongful dismissal. The trial judge held that the original 30-day notice period was "spent" after the sale of the initial 69 homes and that McKee was an employee entitled to 18 months' sever- ance in lieu of notice. Contractor or employee? On appeal, Reid's argued that McKee was a "dependent contractor" and the 30-day notice period still applied to McKee's ter- mination. Reid's argued McKee's exclu- sive relationship with it was in fact evi- dence of that dependent relationship. The Court of Appeal agreed that the law recognizes "dependent contractor" as an intermediate position between employee and independent contractor status, but found McKee was an employee. The Court of Appeal applied the trad- itional test — essentially "whose business is it?" — to determine whether McKee was a contractor or an employee. Factors such as an exclusive contractor agree- ment and whether the worker hires other workers to help perform the work are important considerations but not deter- minative. For McKee, the fact that she worked exclusively for Reid's, used model homes and stationary provided by Reid's, was financially dependent on commis- sions received from Reid's, and was part of a sales force that was a crucial ele- ment of Reid's business led the court to uphold the finding that McKee was an employee. The court noted that dependent con- tractors are a "carve-out" of the contractor category, wholly distinct from employees. Where a worker is found to be a contract- or, courts must then determine whether the worker is a dependent or independ- ent contractor. A contractor who works exclusively for one business is necessarily a dependent contractor. Furthermore, the court held that dependent contractors are owed reasonable notice upon termina- tion because they exhibit a certain min- imum economic dependency. That said, the parties can agree to a notice period less than the minimum statutory notice. In light of this decision, evidence of exclusivity will weigh in favour of an employee status, rather than a dependent contractor status. Thus, the 30-day notice period in McKee's original agreement breached the minimum notice provisions of the Employment Standards Act, 2000. McKee was therefore entitled to reason- able notice of termination, which was held to be 18 months. Employee status disputes are on the rise. So is there a solution? Businesses with Canadian contract- ors are facing an increasing number of employee status disputes. The major con- sequence of finding that a contractor is an employee is the requirement to pay termination pay and back-pay withhold- ing taxes. The experience in Canada to date suggests, however, that the real harm is to the contractor relationships that are strained or ruined as a result of dis- putes about employee status. Businesses can reduce the incentive for contractors to make claims for termination pay by including notice provisions in contractor agreements that equal or surpass employ- ment standards requirements, without explicitly referencing the legislation. IH Henry Dinsdale and Jeff Goodman are labour and employment law partners with Heenan Blaikie LLP in Toronto. INHOUSE DECEMBER 2010/JANUARY 2011 • 7

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