For a variety of reasons, more and more employees want to create companies to provide their services as contractors, rather than employees. Such services will often be identical to those that were provided when the individual was an employee. Subject to a tax, employment insurance or Canada Pension Plan audit, that may be fine while the individual is providing services. But it can go very wrong at the end of the relationship, with many contractors claiming the pay in lieu of notice and severance pay they would have received had they been employees.
Things may be changing in Quebec, however. In Conseillers en informatique d’affaires CIA (CIA) Inc. v. 4108647 Canada Inc., the Court of Appeal of Québec recently said that employees who voluntarily choose to create a company in order to enter into a contract for services with their former employer will not be entitled to notice of termination or pay in lieu thereof, unless the contract provides otherwise.
Facts
In 2002, Solution and Integration of New Concept S.I.N.C. Inc. (SINC) acquired the company for which Ms. Cohen, a senior IT manager, worked for 15 years. Ms. Cohen asked SINC if she could provide her services through a company that she would create for this purpose. SINC agreed and a consulting agreement was signed.
Subsequent to the signature of the agreement and the creation of Ms. Cohen’s company, her daily routine remained the same:
- she continued to work exclusively on projects for SINC despite a clause in the agreement providing that the services rendered by the company and Ms. Cohen were non-exclusive;
- she did not provide her own work location or equipment, despite a clause in the agreement stating that she had to; and
- she had no independent control over her work.
In 2004, CIA acquired SINC. CIA approved the renewal of the agreement with Ms. Cohen’s company. In 2007, CIA advised Ms. Cohen it was terminating the agreement without notice.
Ms. Cohen and the company claimed 18 months of consultant fees, based on Ms. Cohen and the company’s combined total years of “service” with CIA and its predecessors.
Trial Decision
Despite the fact that the trial judge confirmed the agreement could not be qualified as an employment contract because the services were provided by a company rather than by an individual, he nevertheless determined that when the parties to a contract for services have been in a long-term employment relationship prior to the contract and that the only element that differentiates their new contractual relationship is the vehicle through which the services are provided, it may be presumed that the company will be, like an employee, entitled to reasonable notice of termination of the services. According to the trial judge, the substantive rights of the parties that existed under the employment contract continued to apply.
CIA argued that Ms. Cohen, who voluntarily chose this arrangement for fiscal reasons, should not “have her cake and it eat too” and appealed.
Court of Appeal of Québec
The Court of Appeal confirmed that when a service provider is a company, it is only under exceptional circumstances that the court will find that the agreement is an employment contract. This may be the case if it is shown that the company is a “smoke screen” the employer uses to sidestep its obligations.
Such was not the case here. Since Ms. Cohen had freely chosen for her own benefit to provide her services through a company as a contractor, no exceptional circumstances warranted departing from the rule. The Court of Appeal explained further that the law does not allow transferring the rules applicable to an employment contract to a contract for services.
Ultimately, Ms. Cohen was entitled only to 30 days notice, as was specifically set out in the services agreement.
Distinction with Other Provinces
This decision is welcomed in Quebec as it clarifies that if an employee chooses to modify his or her status in order to render services through a corporation, even though little else has changed, the employee forfeits all entitlements he or she would have had as an employee at termination.
But that is not necessarily the case throughout the rest of Canada. In other provinces, courts may take into account the degree of economic dependency that exists between the parties. Where the contractor works exclusively, or nearly exclusively, for the company, the individual may be deemed to be an employee or dependent contractor, and thus entitled to reasonable notice.