A recent appeal court decision demonstrates once again that defining work relationships is far from an exact science. Somewhere on the spectrum between employees and independent contractors, we have seen the emergence of “dependent contractors.” What hasn’t been entirely clear is how one determines “dependent contractor” status. Nor what that status means in terms of the worker’s entitlements on termination.
The Ontario Court of Appeal in McKee v. Reid’s Heritage Homes Ltd. attempts to shed some light on these issues. The decision may have broad ramifications across Canada.
What happened
Elizabeth McKee was first engaged in 1987 by the owner of Reid’s Heritage Homes Ltd. (RHH) to sell 69 new homes. They signed a short, handwritten “Sales & Advertising Agreement” using McKee’s business name, “Nu Home Consultant Services.” The agreement had an exclusivity clause in which McKee agreed that Nu Home would not sell for any other company. The agreement also said that it could be terminated by either party with 30 days’ notice.
Following the sale of the first 69 homes, McKee continued to sell homes for RHH. She was paid a fee for each home sold. As time went on RHH supplied stationery and forms and gave McKee the title of “sales manager.” McKee was paid through her corporation, Bribet Holdings Inc. Sales were going so well that McKee eventually hired, trained, and paid her own sub-agents without interference from RHH.
In 2004 the new owner of RHH decided to restructure the sales force. He told McKee he wanted her and her sub-agents to report to a new corporate sales manager as direct employees. Their relationship deteriorated. McKee ultimately rejected the offer of employment and claimed damages for constructive dismissal.
Court awards 18 months’ notice ($400,000 in damages)
The court found that RHH and McKee were in an employment relationship. The 1987 contract was no longer in effect. An implied term of the employment contract required RHH to provide reasonable notice of termination. Reasonable notice was found to be 18 months. McKee was awarded damages of more than $400,000.
The appeal court acknowledged that case law from across Canada has recognized an intermediary position of “dependent contractor” characterized by economic dependency. However, these cases didn’t follow a uniform approach to the question of the entitlement of these contractors upon termination. With McKee, we have a clear pronouncement by the Ontario Court of Appeal that these workers are owed “reasonable notice” upon termination akin to that an employee would receive.
The court also said that the “dependent contractor” analysis is a two-step process. The first question is whether the worker is an employee or a contractor. Only if the worker is found to be a contractor does one proceed to the second step. That is to determine whether the contractor is dependent or independent. In other words, the “dependent contractor” category is a subset of the contractor category.
Further, while exclusivity is one of many factors to be considered in determining whether a worker is an employee or a contractor, if the worker is found to be a contractor such “exclusivity” will be determinative of his or her “dependent contractor” status. Exclusivity reflects economic dependence.
In determining employment status, McKee tells us that the “central question” to be answered after considering all of the relevant factors is: Whose business is the worker engaged in – his or her own or the principal’s?
Here, McKee worked for RHH exclusively. She was subject to RHH’s control as to where she sold homes, promotional methods used, products sold, and pricing. McKee used RHH’s model home and stationery. She didn’t have an opportunity to realize profit outside of the fixed commissions she earned. She didn’t risk significant capital of her own. It was concluded that McKee’s activity (selling homes) was part of RHH’s business and that McKee was RHH’s employee.
The existence of McKee’s corporation and the fact that she hired her own staff didn’t outweigh the other factors that pointed to employee status.
What do we mean by “reasonable notice of termination”?
Generally speaking, in the absence of a written contract that specifies a worker’s entitlements upon termination, the law will require an employer to provide “reasonable notice” of termination. What constitutes “reasonable notice” in a particular case depends on many factors as ultimately weighed by the subjective views of the trial judge. McKee now clearly says this approach applies to dependent contractors as well as employees. While the court didn’t say the amount of reasonable notice McKee would have received had she been a dependent contractor, it implies that the scale would be the same or similar to that used for employees.
Employers and workers, however, may agree in writing to a specific notice period. Drafted and presented properly, the agreed-upon notice will prevail. However, employment contracts that provide for less notice (and severance pay where applicable) than the minimum required under employment standards laws will be void.
Why is McKee significant for employers?
First, McKee demonstrates that the category of “employee” can capture a broad range of relationships. It can encompass what many employers might consider to be contractor arrangements. Second, employers may be liable to provide reasonable notice of termination to contractors who provide their services on an exclusive basis. The amount of notice may be the same as would apply to employees. Third, a question left unanswered is whether a written agreement governing a dependent contractor relationship must meet the same minimum statutory requirements as would apply to an employment agreement in order to be enforceable.
What should employers do?
In order to minimize the risk that an individual contractor will be found to be your employee, or a dependent contractor entitled to reasonable notice of termination, care must be taken in drafting the governing contract. It should fully describes the “independent” contractor relationship and/or specify the parties’ obligations to one another on termination in a way that is likely to be enforced by the courts. And remember, timing can be everything. An old agreement that no longer describes the actual business relationship may not be enforceable. Nor may be an agreement forced on a contractor after work has begun, in the absence of any benefit to the contractor for entering into a new deal.
