Wednesday, December 23, 2015

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.

(*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


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