Defining the Worker as an Employee, Independent or Dependent Contractor

By Leanne E. Standryk

Previous Corporate Bulletins have focused on the difference between independent contractors and employees and the importance of ensuring that as a Corporation you make the “right” characterization. We have also alluded to another category of individuals, a hybrid between the independent and the employee, The Dependent Contractor. The Court of Appeal has now confirmed this hybrid category of individuals in the case of McKee v. Reid Heritage Homes. As a result, Corporations must now provide “reasonable notice” of termination for both employees and dependent contractors.

In 1987, Reid Heritage Homes entered into a handwritten contract with Elizabeth McKee. McKee provided her exclusive service to Reid to sell 69 homes in exchange for commission. The agreement provided that the relationship could be terminated upon 30 days notice by either party.

After completing the sale of the 69 homes, McKee continued her exclusive service to Reid in exchange for commission income paid through her incorporated business. McKee hired and trained her own contingent of sales staff to assist with her work. McKee paid these staff through the commission she obtained from Reid. Beginning in 2000, the relationship between McKee and Reid began to deteriorate and ultimately the parties parted ways resulting McKee suing for wrongful dismissal damages. Considering her age, qualifications, likelihood of securing alternative comparable employment and 18 years of exclusive service, the trial judge found McKee was an employee and awarded her 18 months pay in lieu of reasonable notice. The Court of Appeal upheld the trial court’s finding that McKee was an employee of the company as determined by the trial judge. The court also confirmed the intermediary “dependent contractor” status, outlining what it entails.

The Analysis: in a nutshell

Stage one:

  • Courts will first determine whether a worker is an employee or a contractor in the normal way, answering questions such as:
  • Who supplies the equipment?
  • What degree of control does the employer impose over the work?
  • How is the worker paid?
  • Does the worker hire and direct workers?
  • Who bears the benefit of profit and the risk of loss?
  • What was the intention of the parties?
  • Is the relationship exclusive?

Stage two: If the worker is found to be a contractor, one then determines whether that contractor is independent or dependent. The sole factor in this determination is exclusivity — whether the employer is the only source of income for the contractor. Exclusivity creates an economic dependency on the Company thereby triggering an obligation by the Company to provide reasonable notice upon termination, just like an employee.

At the first stage, exclusivity is but one factor that is considered. However, at stage two, once it has been determined that the worker is a contractor, exclusivity becomes the sole and defining factor.

Business Perspective Employers are advised to consider the essence of their relationship with their workers, particularly contractors, given that dependent contractors are now entitled to reasonable notice of termination. To manage this obligation, Companies should take steps to ensure they are engaging in best practices by reviewing current relationships with workers and taking steps to properly characterize the relationship and document the terms of that relationship and entitlements upon initial engagement of work.

Consider the following:

  1. Is your relationship with your worker exclusive? If so, there is likely economic dependency.
  2. Are workers performing an essential function of your business? If so, they are more likely to be seen as employees.
  3. Are workers operating under a valid contract? Ensure that your relationship with the individual is properly characterized and documented.
  4. What termination provisions, if any, are contracted? Clearly define your obligations in the document and ensure that you comply, if not exceed, the employment standards minimums.

While this exercise may be viewed by some as a make work project for your business, it should be seen for what it is…an exercise in risk management and minimizing your financial liabilities. If you would like to discuss this matter further please feel free to contact leanne Standryk or Civita Gauley of our Labour and Employment Department. The foregoing is provided to you for information purposes only. We caution you to obtain legal advice specific to your situation in all circumstances.

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