Let's begin our analysis with a review of the distinction between employees and independent contractors.

Everyone understands what an employee is. You hire a worker with either an oral or a written contract of employment, you put the worker on your payroll, you pay the worker a salary subject to statutory withholdings, you may or may not provide company benefits, and everyone understands that they have rights and obligations upon termination. Generally it is not difficult to identify a relationship that is one of employer and employee. What is more much difficult sometimes is the identification of a relationship between an employer and an independent contractor.

The distinction is important for a number of reasons, beginning with the difference in termination rights.

In an employment relationship, a written employment contract will probably spell out the obligations of both sides to give each other notice in the event of a decision to terminate. If there is no written agreement, that obligation will be imposed by the common law. At the very least, every province has legislation that prescribes a minimum notice period as well as additional amounts that might be payable as severance in certain circumstances.

In the case of an independent contractor, there is no applicable legislation relating to termination rights. If there is a written contract for services containing termination provisions, one would expect that those would govern. If there is no written contract, the common law may provide termination rights but this will depend on the circumstances and the extent of the notice that would be required on the extent to which the independent contractor actually looks like an employee. This involves the concept of a "dependent contractor".

In an Ontario Court of Appeal decision called McKee v. Reid's Heritage Homes Ltd., the Court of Appeal made reference to a category of worker known as a "dependent contractor". The court was clear that this is not a third category along with employees and independent contractors. Workers are either employees or contractors. If a worker is a contractor, in certain circumstances the court will go on to decide if that contractor is dependent or independent.

The relevance of this question basically relates to notice upon termination. Where a dependent contractor relationship exists, reasonable notice will have to be provided on termination to the extent that it is not specified in any written agreement. Whether or not the notice has to be as lengthy as it would be if the worker was an employee will have to be determined on a case-by-case basis.

The main characteristic of a dependent contractor is exclusivity. In fact, exclusivity is one of the factors that a court will look at to determine whether a worker is an employee or an independent contractor. However, it is only one of a number of factors used in that analysis. If the court determines that the worker is a contractor based on all of the factors, the exclusivity provision will be considered once again to determine whether or not the contractor is independent or dependent. If there is exclusivity (in the sense that the worker can only work for one company alone), the worker will be seen as entirely dependent on that one company for income. In that circumstance, where a worker is not an employee but is in a position of economic vulnerability, the court will protect that worker by deeming him to be a dependent contractor and therefore entitled to reasonable notice of termination.

In the Wyman case, the plaintiff was a worker who managed the operation of the defendant's resort in northwestern Ontario. The relationship was terminated by the defendant and among other things the plaintiff claimed general damages for wrongful dismissal, on the basis that he was a dependent contractor and as such was entitled to notice of termination.

The court ruled that the plaintiff had functioned as an independent contractor and that either party had the right to terminate the arrangement without recourse or notice. The plaintiff was not in a position of economic vulnerability, having described himself years before as "semi-retired" and with an independent income in the form of a Workers Compensation pension.

There are a number of factors that the court will take into account in determining whether or not a worker is an employee or an independent contractor. I will review these factors in my next blog post. The distinction between an independent and a dependent contractor can also be difficult to determine. As this case illustrates, however, economic vulnerability is the key element in the analysis.


Note: This is a reprint of an article by A. Irvin Schein of Minden Gross LLP.