Dependent or Independent Contractor/Operator? Termination and WSIB Issues

The determination of whether an individual is a dependent or independent contractor has a number of legal ramifications. Two important aspects are the employment relationship between the parties and its termination, and workers compensation.

Some advantages for use of independent contractors are: (1) overtime compensation is not owed to an independent contractor; (2) employee benefits do not have to be provided, nor do employment taxes have to be paid or withheld; (3) the work relationship is governed by contract and not by laws governing compensation; and (4) skills training is not usually necessary.

Some disadvantages to use of independent contractors include: (1) companies often regret situations where non-employees develop expertise about the company business, only to have the workers move on to a new customer when the contract expires; (2) misclassification of employees as independent contractors can result in severe legal penalties and/or legal liability; (3) independent contractors often charge a premium for their services; and (4) lack of contractor knowledge about the company's specific needs.

Simply using the term “independent contractor” in an agreement may not be sufficient for the determination of the status of the individual. This point was recently illustrated in the decision in the Ontario Superior Court in Keenan v. Canac Kitchens 2015 ONSC 1055. In Canac Kitchens the claimants, a husband and wife, both worked for Canac for over twenty years. They began their relationship with Canac as employees. Lawrence Keenan worked for Canac from 1979 to 2009. Marilyn Keenan began working for Canac in 1983. In October 1987, both were summoned to a meeting with Canac management at which time they were told they would no longer be employees, but instead would carry out their work for Canac as independent contractors. They were also told that they should incorporate.

The Keenans were informed that, under the new arrangement, they would be responsible for paying installers. The installers would provide their own trucks and would pick up kitchen from Canac and deliver them to job sites for installation. Canac would set the rates to be paid to the installers and pay the Keenans, who, in turn, would pay the installers. The Keenans, as Delivery and Installation Leaders, would, as before, also be paid on a piecework basis for each box or unit installed; however, the amount paid would be increased to reflect the fact that the Delivery and Installation Leaders were being paid gross, without deductions for Unemployment Insurance, Canada Pension Plan, or Income Tax. Delivery and Installation Leaders would now be responsible for damage to cabinets while in transit, and were expected to obtain insurance to cover such liability.

The Keenans signed a contract with Canac, which described them as independent contractors. They never incorporated. They did register the business name “Keenan Cabinetry”. They obtained the insurance required by their agreement with Canac, and they registered with what was then known as The Workers’ Compensation Board. Although they were responsible for cutting cheques to the installers they supervised, the installers were not their employees. Keenan Cabinetry never registered as an employer with the Canada Revenue Agency for the purposes of withholding taxes and other source deductions.

As far as the plaintiffs were concerned, the 1987 agreement notwithstanding, they continued to consider themselves as loyal employees of Canac. They enjoyed employee discounts. They wore shirts with company logos. They had Canac business cards. Mr. Keenan received a signet ring for 20 years of loyal service. To the outside world, and in particular, to Canac’s customers, the plaintiffs were Canac’s representatives.

In March 2009, the plaintiffs were called to a meeting and were told that Canac was closing its operations and their services would no longer be required. The Canac work quickly dried up.

The Keenans sued for wrongful dismissal.

Justice Mew commented that the law in Ontario relating to dependent contractors is well established, stating (*1):

Employment relationships exist on a continuum; with the employer/employee relationship, at one end of the continuum, and independent contractors at the other end. Between those two points, lies a third intermediate category of relationship, now termed dependant contractors …Like employees, dependant [sic] contractors are owed reasonable notice on termination.

Justice Mew then reviewed the case law on the principles used to distinguish independent contractors from employees. He looked at a 2004 decision (*2) involving commissioned agents, setting out the principles:

1.      Whether or not the agent was limited exclusively to the service of the principal.

2.      Whether or not the agent is subject to the control of the principal not only as to the product sold, but also as to when, where, and how it is sold.

3.      Whether or not the agent as an investment or interest in what are characterized as the tools relating to his service.

4.      Whether or not the agent has undertaken any risks in the business sense, or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission.

5.      Whether or not the activity of the agent is part of the business organization of the principal for which he works. In other words, whose business is it?

Justice Mew concluded that the Keenans were entitled to 26 months of notice after they were found to be dependent, rather than independent, contractors of the employer.

In the trucking area the use of independent operators is common. In fact the Workplace Safety & Insurance Board has indicated that “Hiring subcontractors and/or owner-operators is a common practice in the transportation industry.” (*3)

The WSIB informational brochure provides (*4):

An independent operator is different from a regular employee or worker. An independent operator carries on a business, separate from the employer. Typically, an independent operator in the transportation sector will have the following characteristics:

• The owner-operator pays for the truck and the majority of the equipment or other related property.

• The owner-operator has a choice in selecting and operating the vehicle and has market mobility in that he/she has discretion to enter contracts of any duration to transport goods and maximize profits.

The WSIB uses an organizational test to determine if a subcontractor is an independent operator or a worker.

In the trucking industry, the WSIB's organizational test asks specific questions to confirm that the person qualifies as an independent operator for WSIB purposes. If both parties (the owner-operator and the firm using his/her services) agree that the five criteria outlined in the test are reflective of their work relationship, then the WSIB considers the owner-operator to be an independent operator for WSIB purposes. If the person is an independent operator, they will be registered with the WSIB and the WSIB will be able to provide a clearance certificate to confirm that the person is insured with them.

The WSIB questionnaire provides:

Owner-operators will be treated as independent operators, for workplace safety and insurance purposes only, when the work relationship contains all the following features:

(a) The owner-operator pays for the truck and a majority of the equipment or other related property (such as payments for gas, maintenance of the truck, licence and storage) and is not required to finance the truck and equipment/related property through company sources.

(b) The owner-operator has the right to exercise a choice in selecting and operating the vehicle and has market mobility in that he/she has discretion to enter into contracts of any duration to transport goods and maximize profits.

(c) The principal does not have the right to control where or from whom products/services are purchased by the owner-operator (however, this does not preclude the owner-operator from exercising his/her option to purchase products/services from the company). Also, the principal does not have the right to exercise control over the owner-operator's operations except to the extent that loads are offered, and destinations and delivery schedules are established by the principal's contract with the shipper and except for the joint responsibilities set out in federal and provincial licensing and related statutes.

(d) The principal and the owner-operator state that the relationship is one of a contract for service and not that of employer and employee.

(e) The principal does not issue a Canada Revenue Agency T4, T4A or make statutory deductions for E.I. and/or C.P.P.

It should be apparent that simply using the term “independent contractor” in an agreement may not be sufficient for the determination of the actual status of the individual. A fuller analysis of the relationship is needed so that the parties involved are not caught off guard and faced with surprise costs.

Endnotes

(*1)     2015 ONSC 1055, para. 17

(*2)     Ibid, para. 18

(*3)     So You’re Thinking of Using Independent Operators in Your Transportation Business – Brochure

(*4)     Ibid, page 2

Use of “Without Prejudice” in Communications

The use of the statement “Without Prejudice” in communications appears to be on the rise and, in many situations, it is used incorrectly.

“Without Prejudice” is a statement set onto a written document such as a letter or an email, which qualifies the signatory as exempt from the content to the extent that it may be interpreted as containing admissions or other interpretations that could later be used against the signatory and which could affect the legal rights of the principal of, or the person signing or sending the document.

Without prejudice communication has its origins in settlement negotiations. The courts consistently favour the settlement of lawsuits in general. To put it another way, there is an overriding public interest in favour of settlement. This policy promotes the interests of litigants generally by saving them the expense of trial of disputed issues, and it reduces the strain upon an already overburdened provincial court system. (*1)

Settlement negotiations have long been protected by the common law rule that “without prejudice” communications made in the course of such negotiations are inadmissible. The settlement privilege created by the “without prejudice” rule was based on the understanding that parties will be more likely to settle if they have confidence from the outset that their negotiations will not be disclosed. (*2)

As Oliver L.J. of the English Court of Appeal explained in Cutts v. Head, [1984] 1 All E.R. 597, at p. 605:

. . . parties should be encouraged so far as possible to settle their disputes without resort to litigation and should not be discouraged by the knowledge that anything that is said in the course of such negotiations . . .  may be used to their prejudice in the course of the proceedings.  They should, as it was expressed by Clauson J in Scott Paper Co v. Drayton Paper Works Ltd (1927) 44 RPC 151 at 157, that parties be encouraged to freely and frankly to put their cards on the table.

Rush & Tompkins (*3) confirmed that settlement privilege extends beyond documents and communications expressly designated to be “without prejudice”.  In that case, a contractor settled its action against one defendant, the Greater London Council (the GLC), while maintaining it against the other defendant, the Carey contractors.  The House of Lords considered whether communications made in the process of negotiating the settlement with the GLC should be in the ongoing litigation with the Carey contractors.  Lord Griffiths reached two conclusions of significance for this case.  First, although the privilege is often referred to as the rule about “without prejudice” communications, those precise words are not required to invoke the privilege.  What matters instead is the intent of the parties to settle the action (p. 739).  Any negotiations undertaken with this purpose are inadmissible. (*4)

Lord Griffiths’ second relevant conclusion was that, although most cases considering the “without prejudice” rule have dealt with the admissibility of communications once negotiations have failed, the rationale of promoting settlement is no less applicable if an agreement is actually reached.  Lord Griffiths explained that a plaintiff in Rush & Tompkins’ situation would be discouraged from settling with one defendant if any admissions it made during the course of its negotiations were admissible in its claim against the other. (*5)

The Supreme Court of Canada has set out the rule in a number of cases, the most recent of which is Union Carbide Canada Inc. v. Bombardier Inc. (*6) The Court stated (*7):

Settlement privilege is a common law rule of evidence that protects communications exchanged by parties as they try to settle a dispute. Sometimes called the “without prejudice” rule, it enables parties to participate in settlement negotiations without fear that information they disclose will be used against them in litigation. This promotes honest and frank discussions between the parties, which can make it easier to reach a settlement: “In the absence of such protection, few parties would initiate settlement negotiations for fear that any concession they would be prepared to offer could be used to their detriment if no settlement agreement was forthcoming” (A. W. Bryant, S. N. Lederman and M. K. Fuerst, The Law of Evidence in (3rd ed. 2009), at para. 14.315).

In the Union Carbide decision, the Supreme Court had to look at a confidentiality clause in a mediation agreement. The parties in this case were entangled in a decades long, multi-million dollar civil suit about defective gas tanks used on Sea-Doo personal watercraft. The parties agreed to a private mediation and a standard mediation agreement was signed. It contained a clause regarding the confidentiality of the process. An offer was accepted at the mediation. Two days after acceptance, one of the parties stated that his client considered the settlement to be a “global” settlement. The other party replied that the settlement amount was for the Montreal litigation only. An application was made to the court for homologation (akin to certification or approval) of the transaction. The opposing party sought to strike the allegations contained in some of the paragraphs in the application on the ground that they referred to events that had taken place in the course of the mediation. The application judge held that the mediation proceedings were covered by the Code of Civil Procedure and struck the paragraphs. On appeal, the Court of Appeal found that the Code did not apply and observed that when mediation results in an agreement, communications made in the course of the mediation process cease to be privileged and held that settlement privilege does not prevent a party from producing evidence of confidential communications in order to prove the existence of a disputed settlement agreement arising from mediation or to assist in the interpretation of such an agreement. In dismissing the appeal, the Supreme Court of Canada held that (*8):

A form of confidentiality is inherent in mediation in that the parties are typically discussing a settlement, which means that their communications are protected by the common law settlement privilege … But mediation is also a “creature of contract” … which means that parties can tailor their confidentiality requirements to exceed the scope of that privilege and, in the case of breach, avail themselves of a remedy in contract … settlement privilege and a confidentiality clause are not the same, and they may in some circumstances conflict. One is a rule of evidence, while the other is a binding agreement; they do not afford the same protection, nor are the consequences for breaching them necessarily the same … On the other hand, there are recognized exceptions to settlement privilege at common law that limit the scope of its protection, but such exceptions may be lacking in the case of a confidentiality clause. The question is whether an absolute confidentiality clause in a mediation agreement displaces the common law exception, thereby preventing parties from producing evidence of communications made in the mediation process in order to prove the terms of a settlement.

The Court further added (*9):

There is indeed a delicate balance to be struck. The concerns articulated by commentators about the uncertainty of confidentiality clauses in mediation contracts are legitimate … In my view, the inquiry in each case will begin with an interpretation of the contract. It must be asked whether the confidentiality clause actually conflicts with settlement privilege or with the recognized exceptions to that privilege. Where parties contract for greater confidentiality protection than is available at common law, the will of the parties should presumptively be upheld absent such concerns as fraud or illegality.

The Court recognized the importance of both freedom of contract and the public purpose of furthering settlements. The Court looked at the mediation contract in trying to interpret the intention of the parties. The Court found, “It is my opinion that the parties entered into this mediation process with the intention of settling their dispute and that they had no reason to assume that they were signing away their ability to prove a settlement if necessary.” (*10) The Court held that the parties had not renounced the common law rule that communications made in the course of negotiations can be used to prove the terms of a settlement.

Misuse of the “without prejudice” statement can lead to unexpected results. A party may want to use the document in court to prove a point. For example, a letter stating “We accept your contract for building this vessel in accordance with your specifications set out in Document A123” may be the proof needed to show that a contract exists. Putting the statement “without prejudice” on such a document would be a misuse and foolish. You want the document to be “with prejudice.”

Very recently the British Columbia Supreme Court in Reum Holdings Ltd. v. 0893178 (*11) affirmed the principles set out by the Supreme Court of Canada in Sable Offshore Energy Inc. that the use or non-use of the words “without prejudice” in any settlement negotiation is not necessarily determinative of whether privilege is invoked. What is important is whether the intent of the negotiations was to work towards a settlement of the action.

In another recent decision of the British Columbia Supreme Court (*12), an employee brought an action for wrongful dismissal and for aggravated damages and punitive damages against her employer for the manner in which she was fired. The employee had been given two letters on the date of her termination. The first letter set out her immediate termination. It did not set out any reasons for the termination. The second letter, marked “without prejudice”, outlined the reasons for the termination and contained an offer.  The court held that an employer has an obligation of good faith and fair dealing in the manner of dismissal. The employee claimed she was deeply hurt by the “cold, callous” behaviour of the dismissal. The court found that the employee had not been dealt with fairly and accepted that the dismissal had a negative impact on her emotional well-being. However, the court found that “her evidence does not permit me to find that she suffered mental distress markedly beyond what she would have experienced from being dismissed. I conclude therefore that the plaintiff’s claim for aggravated damages must be dismissed” (*13). The court did not comment on whether the failure to set out the reasons for termination in the letter that was “with prejudice” influenced its decision. The case, however, illustrates the danger of placing information in a “without prejudice” letter that should likely have been in a “with prejudice” letter, leaving only the offer in the “without prejudice” letter.

The question to always ask when determining whether to use the words “without prejudice” is why are we using it? If it is to admit to a customer or client that you were wrong and you are apologizing and let’s resolve the matter, then such use is appropriate and furthers the attempt at resolution of the matter. If the purpose of the document is to summarize what has taken place (for posterity) or to set out the events or course of action or the contract, the use of “without prejudice” would be a misuse.

Endnotes

(*1) Sparling v. Southam Inc. (1988),1988 CnaLii 4694, 66 O.R. (2d) 225.

(*2) Sable Offshore Energy Inc. v. Ameron International Corp., [2013] 2 SCR 623, at para. 13.

(*3) Rush & Tompkins Ltd. v. Greater London Council, [1988] 3 All E.R. 737 (H.L.), at p. 740

(*4) (*2) Sable Offshore Energy Inc. v. Ameron International Corp., [2013] 2 SCR 623, at para. 14.

(*5) Ibid,  at para. 15.

(*6) [2014] 1 SCR 800.

(*7) Ibid, at para. 31.

(*8) Ibid, at paras. 39, 45

(*9) Ibid, at paras. 48, 49

(*10) Ibid, at para. 65.

(*11) 2015 BCSC 2022.

(*12) TeBaerts v. Penta Builders Group Inc., 2015 BCSC 2008

(*13) Ibid, para. 112.