The rise of "gig" workers (i.e. independent workers paid by task or project) has, in recent years, drawn attention to the issue of the classification of workers as "employees", "independent contractors", or "dependent contractors". The determination of the correct classification is crucial, as it defines the parties' legal rights and liabilities, but the distinction is not always easily recognized.
The recent decision in 1159273 Ontario Inc. v. The Westport Telephone Company Limited, 2022 ONSC 1375 (“1159273 Ontario”) sheds light on the distinction between “independent contractor” and “dependent contractor", providing useful parameters for organizations seeking to retain such workers.
Worker Classifications
While organizations are often familiar with the distinction between an employee and an independent contractor, a third category of "dependent contractor" has become increasingly recognized by Canadian courts. Put simply, a "dependent contractor" is a contractor that is more akin to an employee than an independent contractor because they are economically dependent on the engaging organization.
While dependent contractors are not afforded protections under the Ontario Employment Standards Act, 2000, they are presumptively entitled to "reasonable notice" of termination of the relationship, similar to an employee but unlike an independent contractor. This distinction is critical, as organizations engaging independent workers will want to have a clear understanding of their notice obligations.
Notwithstanding the above, Ontario's Bill 88 (the "Working for Workers Act, 2022"), which received Royal Assent on April 11, 2022, will, once in force, introduce some protections for gig workers performing digital platform work through the Digital Platform Workers' Rights Act, 2022 (the "DPWRA"). The protections provided under the DPWRA include rights to information, recurring pay days and pay periods, minimum wage, and notice of removal from the digital platform, as discussed earlier on our blog. The DPWRA is not yet in force (and will only come into force on a day to be named by proclamation of the Lieutenant Governor). Until such time, a gig worker who is not an employee will have such rights as flow from their status as an independent or dependent contractor.
In the above context, Justice Kershman’s decision in 1159273 Ontario as to whether the relationship between the parties was that of an independent or dependent contractor is instructive.
1159273 Ontario - Factual Background
The Plaintiff in this case was a corporation that was controlled and owned by Tom Lynn ("Tom") and his immediate family. The Plaintiff provided contracting services to the Defendant, the Westport Telephone Company Limited ("WTC"). WTC was controlled by Tom's brother, Steve Lynn ("Steve").
Between 1977 and 1996, Tom worked for WTC as an employee. In 1996, Tom incorporated the Plaintiff and began providing similar services to WTC in exchange for a monthly fee (and used Tom exclusively to provide those services). Tom also continued to serve as an employee and director of WTC until 2019. The Plaintiff held an ownership interest in WTC until February 2014 when it transferred that interest to an affiliated entity (and such interest was later sold to an unrelated third party in September of 2019).
In July of 2019, WTC advised the Plaintiff that its services would no longer be required, effective on August 31, 2019. WTC also advised the Plaintiff that it was prepared to pay a further three (3) months of fees. The Plaintiff did not accept WTC's offer and commenced an action claiming, among other things, that it was a dependent contractor and therefore entitled to reasonable notice of termination.
The Decision
Justice Kershman determined that the Plaintiff was an "independent contractor" and therefore not entitled to damages for failure to provide reasonable notice of termination.
In reaching this decision, Justice Kershman reviewed the factors used to determine dependent contractor status, finding that they did not apply to the Plaintiff:
- Exclusivity/ Near Exclusivity – The Plaintiff asserted that it had the requisite exclusivity with the Defendant to demonstrate its status as a dependent contractor. To substantiate its position, the Plaintiff produced its contract revenue charts and Tom's income tax returns. In determining that the Plaintiff failed to show the requisite exclusivity, Justice Kershman noted that:
- Between 1996 and 2010, between 52.83% and 71.48% of the Plaintiff's contract revenue was from WTC;
- Between 2011 and 2013, more than 88% of the Plaintiff's contract revenue was from WTC; and
- Between 2014 and 2019, at most, 70% of Plaintiff's revenue was from WTC.
The Court determined that: (i) billing percentages between 52% to 71% do not amount to exclusivity; and (ii) billing percentages of more than 80% doamount to near exclusivity. Notably, the balance of the Plaintiff's contract revenue derived from companies that were affiliated with WTC.
The Court also heavily weighted the manner in which the Plaintiff’s corporate structure had been developed, finding that it was the design of Tom and his professional tax advisors with a view toward achieving preferential tax treatment.
- Control – The Plaintiff asserted that it was "controlled" by WTC. However, the Court disagreed with this assertion. In fact, the Court determined that it was the Plaintiff, through Tom, that actually had control over WTC as a result of the Plaintiff's minority ownership interest in WTC.
- Tools – The Court determined that WTC provided Tom with equipment, including an office and staff (and, thus, the "tools" necessary to do his job). However, those tools were provided to Tom, in his individual capacity as an employee, and not to the Plaintiff corporation.
- Degree of Business Risk or Imputation of Profits – The Plaintiff argued that it did not have any business risk or expectation of profit when it provided its services to WTC. However, the Court found that, overall, Tom (who was not a personal litigant) made a profit or loss through his shareholding in WTC based on the overall success of the Defendant.
- Integration – Although the Court noted that, publicly, both Tom and Steve were represented as the "face" of WTC, it found that the parties were not integrated because the Plaintiff was never shown on the organizational charts of WTC (and the Plaintiff had no formal title at WTC, even though Tom was the former "Director of Technical Operations").
Impact & Key Takeaways
With the rise of the "gig" economy, organizations often crave the flexibility that stems from an independent contractor relationship. However, to avoid being surprised by a workers' contrary assertion at the end of that relationship, businesses seeking to engage, or terminate, contractors should carefully consider the factors that the courts apply in classification decisions.
While the circumstances of this case are undoubtedly unique, organizations should review their contractor relationships to ensure that there is an absence of economic dependency, exclusivity, control, and the provision of tools / equipment. Businesses should also ensure that contractors have a chance of profit and risk of loss from the relationship, and are viewed as separate and distinct businesses. Tom's use of a corporate vehicle to render services also proved to be critical to WTC's success in defending this claim.
Lastly, the parties in this case did not have a written agreement in place (an independent contractor agreement was provided to the Plaintiff, but Tom refused to sign it). A written agreement could have been of significant assistance in setting out the parties' intended relationship and defining the respective termination rights and obligations. However, even with a written agreement, the Court will always determine the correct classification by looking to the actual relationship between the parties. It is therefore important that the relationship with the independent contractor, in practice, reflects the contractual terms.
The author would like to acknowledge the support and assistance of Jillian Skinner, articling student at law.
