Williams HR Law LLP

EMPLOYEE STATUS: WHEN IS A WORKER A DEPENDENT CONTRACTOR?

January 17, 2020

January 17, 2020

For businesses of all sizes, independent contractors can be a useful resource to meet business needs. They often offer significant savings for businesses as they are not entitled to benefits under employment standards legislation as employees are. However, there is a risk that working relationships with individuals intended to be independent contractors may unintentionally be employer-employee relationships.

Depending on the circumstances of these relationships, courts and other adjudicators may find that “independent contractors” are, in fact and at law, employees, despite what the contract may say. Where workers are improperly classified, employers may find themselves facing unexpected expenses, such as the obligation to provide notice of termination, or pay in lieu thereof, based on common law reasonable notice to workers they had considered independent contractors.

To make employee status matters even more confusing, in addition to employees or independent contractors, workers could be considered “dependent contractors”. Dependent contractor relationships are an intermediate category between employment relationships and independent contractor relationships that the Ontario Court of Appeal (“ONCA” or “Court”) has defined as “non-employment work relationships that exhibit a certain minimum economic dependency, which may be demonstrated by complete or near-complete exclusivity.” Critically, dependent contractors are entitled to reasonable notice of termination, or pay in lieu thereof, under the common law, unless they agree to a lesser notice entitlement—similar to employees. Accordingly, employers would be well advised to apprise themselves of the distinction between independent and dependent contractors. Otherwise they may find themselves on the hook for unexpected liability upon termination of their working relationship with a contractor, which may be substantial in the case of lengthy relationships.

 In Thurston v Ontario (Children’s Lawyer) [Thurston] the ONCA provided valuable guidance for employers with respect to the distinction between independent and dependent contractors by clarifying the meaning of “near-complete exclusivity”.

Background and the Motion Judge’s Decision

 In Thurston, Ms. Thurston, a lawyer practicing independently, claimed she had been a dependent contractor for the Office of the Children’s Lawyer (“OCL”) and sought 20 months’ pay in lieu of reasonable notice after the OCL refused to renew her retainer. Ms. Thurston had provided legal services for the OCL for 13 years, pursuant to a series of fixed-term agreements (the “Contracts”), while she also maintained her own legal practice. Notably, each of the agreements, which ranged from one to two years in duration, did not provide for automatic renewal and required Ms. Thurston to apply for renewal upon their expiry.

Ms. Thurston’s work for the OCL accounted for an increasing percentage of her total annual billings over the years. Although Ms. Thurston’s OCL work accounted for as little as 14.8% of her annual billing in the earlier years of her performing work for the organization, it accounted for as much as 62.6% of her annual billings in later years. In total, over the 13-year period, an average of 39.9% of Ms. Thurston’s annual billings were from her OCL work.

On a motion for summary judgment, the motion judge found that Ms. Thurston was a dependent contractor for the OCL and was entitled to reasonable notice of termination because of the long-term nature of the relationship between the parties, the public’s perception that she was an OCL lawyer, and the fact that she performed work that was integral to the OCL, under the OCL’s control.

Consequently, the motion judge dismissed the OCL’s motion for summary judgment and ordered that Ms. Thurston’s notice entitlement/damages be determined at trial. Before trial, however, the OCL appealed the motion judge’s decision regarding Ms. Thurston’s dependent contractor status to the ONCA.

The Appeal Decision

The ONCA overturned the motion judge’s decision and held that Ms. Thurston was an independent contractor for the OCL and was therefore not entitled to reasonable notice of termination. The Court found that the motion judge’s decision was unreasonable because the motion judge misapprehended the nature of the relevant legal standard and failed to properly consider relevant factors in applying that standard.

In reaching this decision, the ONCA affirmed that “exclusivity of service provision, and therefore of income, is key” in determining dependent contractor status. The Court noted that, where a contractor does not exclusively provide services to the other contracting party, the contractor must earn “substantially more than a majority” of their income from the services they provide to the other party to reach the threshold of “near-exclusivity”. Consequently, the Court found that Ms. Thurston could not be considered to have a relationship of “near-exclusivity” with the OCL because her work for the OCL accounted for only 39.9% of her billings on average over the 13-year period. The court stated that “although ‘near-complete exclusivity’ cannot be reduced to a specific number that determines dependent contractor status…substantially more than 50% of [Ms. Thurston’s] billings” would need to arise from her work for the OCL to meet the near-exclusivity requirement.

The Court also found that the motions judge had erred in failing to properly consider that:

  • The Contracts contemplated that Ms. Thurston would continue operating her own legal practice and required her to confirm that she did not exclusively provide service to the OCL;
  • Ms. Thurston did, in fact, continue her private practice throughout the 13-year period;
  • The OCL did not guarantee Ms. Thurston any minimum amount of work;
  • The OCL reserved the right to terminate Ms. Thurston’s retainer at any time, in its sole discretion and without liability;
  • Ms. Thurston had her own office, supplies, and staff; and
  • Ms. Thurston’s private practice was her main source of income throughout the retainer.

Consequently, the Court allowed the appeal and substituted an order granting summary judgment to the OCL dismissing Ms. Thurston’s action.

Takeaways

Thurston illustrates that determinations regarding dependent contractor status are contextual and cannot be reduced to a bright-line test. Nonetheless, this decision provides useful guidance to employers in that it clarifies that “substantially more” than 50% of a contractor’s income must come from the provision of services to the other contracting party to constitute “near exclusivity” and therefore establish a dependent contractor relationship.

As discussed above, employers may be subject to unexpected termination-related liability if they fail to apprise themselves of the distinction between independent and dependent contractors. Consequently, as a best practice, employers should include language in their agreements with contractors that makes it clear that the contractor is not guaranteed any minimum amount of work and that requires the contractor to confirm that they do not work exclusively for the employer. While such language is not determinative of the nature of the relationship since it is the true nature of the relationship that will rule the day, it is a factor that decision-makers will consider, and it will help set expectations for both the employer and the worker.

Moreover, even if employers are sure of the nature of the relationship when it began, they would be well-advised to periodically review their working relationships with contractors. This allows employers to ensure that the relationship has not changed in a way that the employer did not intend (e.g., that the contractor has not begun earning substantially more than 50% of their income from their work for the employer), and to limit unforeseen costs if the relationship ends.

This blog is provided as an information service and summary of workplace legal issues. This information is not intended as legal advice.

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