Improperly classifying an employee as an independent contractor may have significant legal consequences for an employer.
While employees are statutorily protected under the Ontario Employment Standards Act, 2000 (“ESA”), and are entitled to certain employment rights under the ESA such as termination pay, vacation pay, minimum wage and sick leave, independent contractors are not statutorily protected.
Classifying an Employee
A “dependent contractor” is an intermediate category between an employee and an independent contractor. While dependent contractors are not protected under the ESA, dependent contractors are entitled to receive reasonable notice of termination of the contractor relationship or pay in lieu thereof based on the common law. To be considered a dependent contractor, the working relationship needs to exhibit a certain minimum economic dependence, which may be demonstrated by complete or near complete exclusivity.
A recent Ontario Superior Court decision, 1159273 Ontario Inc. v. The Westport Telephone Company Limited, provides employers with greater insights into how the Courts distinguish between independent and dependent contractors. In this case, the Plaintiff, 1159273 Ontario Inc. (“115”), was a corporation controlled and owned by Tom Lynn (“Tom”) and his immediate family.
The Defendant, the Westport Telephone Company, Limited (“WTC”) provides telecommunications services.
Tom provided services to WTC as an employee between 1977 and 1996. From 1996, Tom incorporated 115, and began providing services through 115 as a contractor to WTC in exchange for a monthly fee.
At various points during Tom and WTC’s working relationship, Tom served as president, vice president, and a director of WTC until his termination in 2019. WTC offered to pay a further three (3) months of fees in addition to the advanced notice of termination.
Tom, through 115, did not accept WTC’s offer and commenced a legal action claiming, among other things, that 115 was a dependent contractor and therefore, entitled to reasonable notice of termination.
The Court held that 115 was an independent contractor and therefore not entitled to damages for failure to provide reasonable notice of termination.
The Court considered the following factors in rendering their decision:
The Court rejected 115’s argument that it was economically dependent on a vast majority of its contracting income from WTC and that it performed services exclusively for WTC.
The Court found that 115 did not work exclusively for WTC. Rather, between 1996 and 2010, only 52.83% to 71.48% of 115’s contract revenue was from WTC, between 2011 to 2013, more than 80% of 115’s revenue was from WTC, and between 2014 to 2019, 70% of 115’s revenue was from WTC.
The Court held that while billing percentage of more than 80% may amount to near exclusivity, 52%-71% does not amount to exclusivity or near exclusivity. As the majority of the working relationship between 115 and WTC did not constitute exclusivity or near exclusivity, the Court held that 115 did not meet the threshold of a dependent contractor.
115 argued that WTC had control over 115, because through 115, Tom worked full time for WTC, worked WTC’s usual hours and such outside work hours as required to fulfil its role, held a title provided by WTC, and was subjected to the supervision and policies of WTC.
However, the Court determined that due to 115’s minority ownership (29 percent of WTC’s shares) interest in WTC, 115’s argument that WTC had control over 115 could not be established.
Provision of Tools
115 argued that WTC provided it with the tools to perform its services such as the use of its premises, an office, and WTC’s support staff. While the Court agreed with 115 that WTC provided it with equipment, those tools were provided to Tom as the president, director, and officer of WTC at various times, and not to 115.
Business Risk or Expectation of Profit
While 115 argued that it did not have any business risk or expectation of profit when it provided its services to WTC, the Court found that 115’s shares in WTC increased in value and was paid out in yearly dividends. In addition, the Court found that 115 was essentially used as a tax planning and tax saving strategy to reduce 115’s and Tom’s incomes. Therefore, given the degree of control that Tom and 115 had in shifting income streams in addition to payment received from ancillary companies, the Court held that 115 did have an expectation of profit and business risk.
115’s position was that providing technical advice on and support to network design was an integral component of a telecommunications corporation normally performed by employees.
However, the Court found that while Tom was the Director of Technical Operations, 115 never held that title, which brought into question the validity of the level of integration between 115 and WTC. Furthermore, from 1996 to 2013, 115 provided consulting services to the ancillary companies in addition to WTC during this period.
Based on the above factors, the Court held that 115 was not a dependent contractor and thus, not entitled to reasonable notice under the common law.
Takeaways on Classifying an Employee
Misclassification of workers may result into major legal liabilities for employers. The Courts assess misclassification of workers on a case-by-case basis and therefore, it is prudent for employers to seek legal counsel from an experienced employment lawyer to carefully review and assess the validity of contractor agreements.
Contact Minken Employment Lawyers today!
Do you have questions surrounding classification of your workers? At Minken Employment Lawyers, our lawyers are experienced in assessing the level of economic dependency, the degree of exclusivity and control to determine the classification of the worker. We also regularly draft and review independent contractor agreements to ensure that employers are correctly classifying a worker. Contact Minken Employment Lawyers today to speak to a member of our team: 905-477-7011 | Toll-Free: 1-866-477-7011 | email@example.com.
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Please note that this article is for informational purposes only and does not constitute legal advice.
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