Sandra Richmond is a partner at the Toronto law firm of McMillan Binch and a member of the firm’s KNOWlaw group.

What happens when an independent contractor turns out to be an employee in disguise? Or maybe not an employee, but something like an employee?

A recent Ontario court decision suggests that in some circumstances the law will impose ’employment-like’ rules even where the parties are independent contractors.

Popularity of independent contractor relationships

Independent contractor relationships are popular throughout the film and television production and broadcast industries. The attraction of the independent contractor relationship, of course, is that it is not an employment relationship and that it is not subject to legislation and case law governing employees.

For example, the engagor doesn’t have to pay employee benefits and withhold and remit the amounts required under employment and income tax legislation. The contractor’s pay is not reduced by source deductions and the contractor can deduct business expenses when calculating income tax.

And it’s a flexible arrangement when the parties want to limit their commitment to a certain time period or a specific project.

Typically, the rights of the parties – including termination rights – are governed by the terms that they’ve agreed to. And, generally, courts are reluctant to rewrite a written commercial agreement.

The court decision

However, recently an Ontario court awarded an independent contractor whose agreement was terminated notice rights similar to those usually given only to employees. It did so despite an express provision in the agreement that either party could terminate it without notice or penalty at any time.

The contractor, an independent sales agent, sued for damages for wrongful dismissal (or, alternatively, breach of contract) when his agreement was abruptly terminated after 19 months of service.

In its defence, the company that had engaged the agent relied on the termination provisions in the agreement and a provision of the agreement that explicitly stated that the parties were independent.

The question of whether an individual is actually an employee has been seen as a question of law that is up to the court to determine, based on the circumstances of a particular situation. In this case, though, the court’s conclusion seemed to fall somewhere between the two.

The court disagreed with the agent’s claim that the relationship was really an employment relationship and stated that, based on that finding, the agent would normally have no claim for damages for wrongful dismissal.

However, the court concluded that even though the relationship was one of ‘independent contractor,’ the agent was entitled to some form of notice of termination because this ‘modern-day emerging relationship’ was more like an employment relationship than the traditional independent contractor relationship.

The court ruled that the provision in the agreement denying the agent any notice of termination was unreasonable and thus unenforceable. It then imposed a provision in the contract that required reasonable notice of termination or payment in lieu of notice.

What’s a fair termination payment?

In determining the amount of the payment, the court acknowledged that the amount should reflect the fact that the parties agreed to establish an independent contractor relationship from the outset and that the amount that would be given to a wrongfully dismissed employee would be too high in this case. The agent was awarded damages of five times the agent’s average monthly commissions and bonuses.

The court’s ‘intermediate’ position – that the agent’s rights fell somewhere between independent contractor and employee – was influenced by several recent Supreme Court decisions that emphasized the nature of the employment relationship and the significance of employment to the individual and society as a whole.

The court noted that there would be no hardship for the company in terminating the agreement – it could readily hire another agent. However, if the company terminated the agreement, the agent would be instantly cut off from earning income and would have to start all over again with another supplier.

Similar considerations might apply in situations where an individual works almost exclusively on one production (like an ongoing series), or for one company for an extended period of time. This reliance on one engagement may look like something close to employment, even if the parties agree that it is an independent contractor relationship.

Employee/independent contractor test

Of course, a statement in their agreement that the parties are independent contractors has never been enough on its own to establish the relationship. The courts have always looked at a number of characteristics to determine whether the individual is an employee.

The Supreme Court has recently ruled that the central question in all cases is whether the worker performs services ‘as a person in business on his own account.’ Some of the relevant factors to consider are:

* the degree of control over the worker’s activities;

* whether the worker provides his or her own equipment;

* whether the worker hires his or her own helpers;

* the degree of financial risk undertaken by the worker;

* the degree of the worker’s responsibility for investment and management; and

* the worker’s opportunity for profit.

Whether a person is considered to be an employee or an independent contractor has significant consequences for both the individual and the employer. The distinction applies not just to the application of income tax and employment legislation, but also to the vicarious liability of the employer, the availability of an action for wrongful dismissal, the priority of claims in an employer’s insolvency and which party is the first owner of copyright in a work created in the course of employment.

(Unlike U.S. copyright law, there is no ability to deem an independent contractor’s work a ‘work made in the course of employment,’ thus making the employer the first copyright owner. In Canada, the individual must actually be an employee.)

But the recent Ontario decision implies that in some cases, the courts may impose employment-type considerations even in an independent contractor relationship. This seems more likely to happen if the arrangement seems closer to an employment relationship, and especially in circumstances where the individual is particularly economically dependent on the arrangement.

What to do

At the very least, the decision suggests that companies that decide to terminate independent contractors should consider whether to give reasonable notice of termination or a payment in lieu of notice, no matter what their agreement says.

Companies might also try to help protect themselves by adding to at least some of their agreements an explicit notice period that the parties have agreed to, rather than having the courts decide it for them.

(THIS article contains general comments only. It is not intended to be exhaustive and should not be considered as advice on any particular situation.)

-www.mcbinch.com