Dependent Contractor addressed by the Ontario Court of Appeal

In late December of last year the Court of Appeal recognized the existence of the dependent contractor in the case of McKee v. Reid’s Heritage Homes Ltd.

In this case, the plaintiff was an in-house sales agent for Reid’s Heritage Homes. Reid’s is a new home builder that originally retained the services of McKee to sell new homes in the Guelph area. McKee would conduct the sales of the new homes within model homes supplied by Reid. She began her work with Reid in around 1987 and she was paid through her own registered corporation. Over the years she became very busy with her work through Reid and over time, she hired, trained and managed her own sub-agents with whom she split her commissions on their sales without any intervention, direction or interference from Reid.

In 2004, a corporate sales manager was hired by Heritage Homes to restructure their entire sales force, inclusive of their relationship with McKee. In 2005, Heritage Homes told McKee that she and her sub-agents would have to work for Heritage as direct employees. McKee, (who was 64 years old at the time) decided that she would agree on the terms as well as a 100-lot assurance to McKee for the following 2 years. After this, Heritage pulled back the refusal to agree to 100 lots per year and from that point forward, the relationship between McKee and Reid Heritage fell apart. McKee sued Reid for wrongful dismissal. After a 4 day trial in Guelph, the Judge released a 51 page Judgment that noted that an original agreement that was made between McKee and Reid in 1987 was “spent” after the sale of the initial 69 homes which she was retained for to sell.

The main issue in the trial was whether or not McKee was an employee or an independent contractor, or even a dependent contractor. The trial Judge found that the plaintiff was an employee and as such she was entitled to pay in lieu of reasonable notice which was assessed at 18 months or about $400,000.00. The Judgment was appealed to the Court of Appeal, and the major analysis, important to this article, is the Ontario Court of Appeal’s analysis of employee vs. dependent contractor.

The court revisited many cases leading up to the “intermediate” category of a dependent contractor. The basic test set up by the Court of Appeal was to determine whether or not a worker is a contractor or an employee. The next step is required only if the first step results in the contractor conclusion – and it determines whether that contractor is independent or dependent, for which a worker’s exclusivity is determinative as it demonstrates economic independence. The Court explained that if a contractor is in a position of economic vulnerability, then it would make sense to carve out a dependent contractor category out of a broader existing contractor category and leave the definition of employee intact.

The trial Judge’s determination that McKee was an employee is in fact determinative under the law. They noted that McKee worked exclusively for the defendant’s company. They also found that McKee’s work was subject to the defendant’s control, as to where she sold, her promotional methods, what she was to sell and how much she was to sell it for. Thirdly the Court found that McKee performed her sales function in model homes provided to her by Reid’s Heritage Homes and they were in control of these tools. Fourthly, McKee was financially dependent on Reid’s Heritage Homes and fifthly, the sales force of which McKee was a member of was a crucial element of Reid’s business organization. The fact that she operated her own corporation within her work for Reid was not determinative of her work status. The Court also found that it did not matter that she had her own sub-agents. Technically, and employee can act as a conductor between higher management and staff within their divisions. The Court also addressed her first agreement with Heritage Homes from 1987. That agreement held that either party could terminate the agreement by giving each other 30 days notice. The Court found that if McKee was an employee at Heritage Homes from 1987 to 2005 then that 30 day notice period in the 1987 agreement contravenes the Employment Standards Act.

The Court, in conclusion did not interfere with the 18-month notice order. It is important for employers to be aware that because their employees remain within their own corporations to control their own taxes, it simply does not mean that they are going to be labelled as dependent contractors. The Court of Appeal in this case confirmed that this intermediate category of a dependent contractor does in fact exist and because of this, employers that engage contractors into contracting relationships will have to be careful because if it is found that the relationship creates one of economic dependency it may give rise to reasonable notice.

If you need to discuss the issues of independent, dependent contract status vs that of an employee please feel free to give our Burlington Ontario Employment Lawyers a call at Haber & Associates. at 905.639.8894

Matt Lalande