Question: We have had the same contract worker working for us full time for 10 years. Due to restructuring, we will no longer require their services and will sadly have to let them go. How much notice do we need to give and do we need to pay severance?
The first question to answer is if this contract worker providing services to you over the last 10 years is an independent contractor, dependent contractor, or employee. This difference is crucial because it determines what, if anything, your contract worker is entitled to on termination.
If they are truly an independent contractor, you do not owe them anything on termination, unless provided for by contract. If they fall into the hybrid intermediate category of a dependent contractor, you will have to provide reasonable notice of the termination of their services, unless provided otherwise by contract. If they are an employee, you will owe them common law reasonable notice, unless you have otherwise limited the entitlement by contract.
To assess if they are an independent contractor, dependant contractor, or employee, courts will look at the relationship between you and the contract worker. A court will look at several factors to determine if the contract worker is an independent contractor, the intermediate category of dependent contractor, or an employee, including:
- If the worker controls the method of doing work;
- If the worker can hire and fire other employees;
- If the worker relies on the employer for most of their income; and
- If the worker exclusively, or almost exclusively, works for the employer.
In your case, the most salient factor is that it appears the contract worker exclusively, or almost exclusively, works for you.
If the contract worker is an “independent contractor”
If the contract worker is an independent contractor, good news, the minimum standards of employment standards legislation do not apply. If in Ontario, that means you are not obligated to provide notice or severance under the Employment Standards Act (ESA), nor would common law reasonable notice apply, unless it was provided for by contract.
While some employers have lawfully structured their organizations to accurately classify independent contractors as independent contractors and employees as employees. Many others have misclassified their employees as independent contractors to bypass the ESA. This is a dangerous practice, as it plainly contravenes the ESA.
If the contract worker is a “dependent contractor”
Even if the contract worker might be an independent contractor, since they are working exclusively or almost exclusively for you, another consideration is whether they might fall into the intermediate category of dependent contractor.
In McKee v Reid’s Heritage Homes Ltd., 2009 ONCA 916, the Ontario Court of Appeal stated that a dependent contractor is an intermediate category between an employee and independent contractor that is defined by a complete or near-complete exclusivity with the employer. Importantly, dependent contractors are entitled to reasonable notice of termination of their contract.
Note that dependent contractors are self-employed, remit their own statutory deductions such as CPP, EI and income tax, and share many of the characteristics of an independent contractor, but rely on you for all or most of their income.
If the contract worker is an “employee”
If your contract worker is found to be an employee, they would be entitled to reasonable notice of termination, unless they have a contract that has validly limited them to some other entitlement with enforceable termination provisions. No contract can limit an employee’s termination entitlements to less than their minimum entitlements under the ESA.
Further, if your contract worker was found to be an employee, you could be in arrears for 10 years of CPP, EI, and income tax.
So, you are probably asking “what does this all mean for my business?”
The consequences of being employee or dependent contractor rather than an independent contractor are dramatically different on termination. Using this scenario as an example, if the worker is 45 years old, employed by you for 10 years, and earning $85,000 per year, that employee could be entitled to a total of 52 weeks’ common law reasonable notice, or $85,000 pay in lieu of notice! Remember that both employees and dependent contractors are entitled to reasonable notice of termination.
If you have a written contract with a valid termination clause, this could be limited to a minimum entitlement of 8 weeks’ notice of termination, plus severance pay of a further 8 weeks, for a total of $26,000, under the ESA. An enforceable termination provision would potentially save you nearly $60,000 in pay in lieu of notice.
Finally, before terminating any worker, we encourage you to contact an experience employment lawyer for legal assistance, as the line between an independent contractor, dependent contractor, and employee can be blurry and complex.
We encourage you to contact Hum Law to assist you with structuring your organization to ensure ESA compliance.
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