Canadian Contractors – Dependent or Independent?
One of the relatively unique features of Canadian workplace law is that there is a recognized category worker called a “dependent contractor”, which is a status which lies in between employee and independent contractor. This “third category” of worker may have employee-like rights (and in some cases obligations) depending on the relevant legislative regime.
A recent Ontario decision provides helpful insights into the distinctions between those who are dependent vs. independent contractors. In its decision in 1159273 Ontario Inc. v. The Westport Telephone Company Limited, 2022 ONSC 1375 (“Westport”), the Ontario Superior Court of Justice provided very useful guidance on the applicable legal tests for contractor status.
Categories of Canadian Workers
In part because of recent media attention associated with the gig economy, many employers and workers are familiar with the classic distinction between workers who are classified as either an “employee” or a “contractor”. This framework often results in an “either/or” question about a worker – either they are an employee, or they are a contractor. However, with the additional category of “dependent contractor”, there needs to be a further review about whether or not a “non-employee” (ie. a contractor) is dependent or independent.
There are practical and legal implications why it is important to distinguish between dependent vs. independent contractors. All contractors do not have access to or rights under Canadian employment standards legislation such as the Employment Standards Act in Ontario, since those rights are only available to employees. However, dependent contractors will have a right to claim reasonable notice (which involves a severance-like right to notice of payment in lieu) when the relationship is terminated.
Tom Lynn Claim – Seeks Dependent Contractor Status
The Westport decision involved a claim initiated in the context of a contracted services arrangement between two companies which were controlled by two brothers. The plaintiff in the case was a company owned by Tom Lynn (“Tom”), who provided services to Westport Telephone Company Limited, which was controlled by his brother, Steve Lynn (“Steve”).
During the period from 1977 to 1996, Tom worked for Westport as an employee. Then, in 1996, he incorporated his own company and began charging a monthly fee. This services arrangement continued until July 2019, when Westport advised Tom’s company that the relevant services were no longer required.
When Westport provided its notice of termination, it advised Tom’s company that it was prepared to pay three months worth of fees as compensation. This offer was not accepted, and the contractor company claimed it was entitled to reasonable notice of termination.
Court Ruling: Independent Contractor – Not Entitled to Reasonable Notice
After reviewing relevant facts and legal arguments, Mr. Justice Kershman held that Tom’s company was an independent contractor, and that Westport had no obligation to provide reasonable notice of termination. The decision provides a clear and useful analysis of the test to be applied in determining independent vs. dependent contractor status. The key factors to review and the relevant determinations from the case are as follows:
Exclusivity / Near Exclusivity – While Tom has previously been an employee, the Court noted the importance of analyzing this and other relevant issues at the time of termination. This resulted in a finding that there was no exclusivity since the amount billed to Westport was in the range of 52% to 71%. The Court held that billing percentages of less than 80% mean there is no exclusivity.
Control – Tom’s company claimed that it was controlled by Westport. The Court rejected this based on a close analysis of the corporate structure. As a matter of more general application, the point is that Tom and his company were not able to demonstrate that they lacked control over how work could be performed.
Tools – The materials submitted in the case confirmed that Westport provided Tom with equipment, an office and staff required to perform the work. However, these tools were held to have been provided to Tom in his personal capacity as an employee, and not to his company. In other words, the provision of tools to an employee of an independent contractor is not, in and of itself, an indicia that the individual employee is a dependent contractor of the other contracting party.
Degree of Business Risk – Tom’s company argued that it should be held to be a dependent contractor since there was no business risk associated with the arrangement since there was essentially a fixed fee. The Court rejected this, finding that Tom personally had a chance of profit and risk of loss based on the fact that he was a shareholder of Westport.
Integration – A worker is more likely to be found to be an employee or dependent contractor if they are integrated into the organization of the party which receives or benefits from their services. In this specific case, the Court held that Tom and his company were not integrated into Westport since they were not shown on any organization charts.
Takeaways
While each case is decided on its unique facts, the Westport decision does offer a useful framework to assess the status of dependent vs. independent contractors. All organizations who use contractors should review the relevant relationship to assess the relevant levels of economic dependency, exclusivity, control and integration. If the goal is to have contractors classified as independent, it will likely be very important going forward that there is some reasonable opportunity of profit (and the related risk of loss). One specific issue from Westport was likely a key problem for the losing party – there was not a written agreement in place which established the alleged dependent contractor arrangement. This outcome reinforces the importance that any intended arrangement be supported by a related written agreement.