Many businesses opt for fixed-term contracts or independent contractor agreements believing that they can better manage their risk exposure. Some believe that using fixed-term contracts simplifies the process of ending employment without cause, as they can merely allow the contract to expire. Others view independent contractor agreements as a way to reduce both the risk of non-compliance with employment standards and the need for statutory deductions and withholdings. Combining both approaches and utilizing a fixed-term independent contractor agreement might also seem advantageous. Unfortunately, unless executed meticulously, any fixed term contract will actually expose businesses to significant risk.

Importance of a valid early termination clause

A recent ruling from the Ontario appeal court, Monterosso v. Metro Freightliner Hamilton Inc. (“Monterosso”), serves as a warning of the potential pitfalls of a badly executed fixed term contract. The court upheld a substantial damages award exceeding $600,000 in favor of a contractor whose 72-month contract was unceremoniously terminated after just seven months. The primary reason for this significant award was the absence of a valid termination clause in the contract.

The court’s judgment was unequivocal: the contract explicitly specified a fixed term without any provisions for early termination. Consequently, the contractor was entitled to compensation equivalent to what would have been earned during the remaining 65 months of the contract. The Court of Appeal also distinguished between employment fixed term contracts and contractor fixed term contracts, and accepted the business’s  submission that the contractor had a duty to mitigate the termination of the contract. However, ultimately the  business did not have sufficient evidence to prove the contractor’s failure to mitigate damages and the alleged modification of contract terms through email correspondence. A properly drafted early termination clause would have prevented this costly result. This case underscores the importance of meticulously drafting fixed-term contracts.

Failure to track expiration dates can be costly

Furthermore, employers must exercise caution when utilizing fixed-term employment contracts for extended durations or continuous work. Keeping track of the expiration date of a fixed-term employment contract can be challenging. If an employee continues to perform their duties beyond the contract’s expiry date, even for a day, the employment will have been inadvertently converted to indefinite term employment. This, in turn, renders the safeguards outlined in the written contract ineffective. Moreover, if an employer routinely renews fixed-term contracts, the court may perceive that it is an indefinite term working relationship, effectively nullifying the benefits of a fixed-term contract. This could potentially obligate the employer to significant termination payouts.

Contract worker vs. employee

Another critical risk for business lies in the possibility of contractors being reclassified as employees. It is imperative to understand that the determination of worker status hinges on the actual nature of the parties’ relationship. As explained in Keenan v. Canac Kitchens, the language contained within the contract cannot be relied on if in fact the relationship is that of employer and employee. If that is the case, even a well-crafted independent contractor agreement may not shield an employer from reclassification. Such reclassification can lead to severe financial consequences, including obligations for additional taxes, CPP contributions, EI premiums, vacation pay, overtime pay, and even termination and severance pay. Particularly in cases where such a working relationship has endured for several years, the financial burden on employers, both in terms of compensating workers and satisfying the Canada Revenue Agency, can be substantial, with limited recourse for indemnification from the employee.

Mitigating the risks

To mitigate these substantial risks, businesses must take proactive steps to ensure that their contractors genuinely meet the criteria for independent contractors. A written independent contractor agreement  clearly defining the nature and terms of the working relationship  must accurately reflect the actual practices and conduct of both parties involved. An enforceable early termination clause is indispensable.

For a fixed-term employment contract, businesses should first think about whether it is one of the situations to use a fixed-term contract instead of a permanent contract. For example, the employee is here for a specific project or to step in for a person on leave; second, the contract needs a valid early termination clause and is in compliance with applicable employment standards legislation; and Diligent contract administration, especially regarding expiration dates, is absolutely crucial.

The court, in Monterosso,  also clarifies that, although the burden of proof lies with the employer to demonstrate the worker’s failure to mitigate damages, there exists a reciprocal obligation on the part of the worker. When fixed-term independent contractor agreements are prematurely terminated in accordance with contract terms, workers may have a duty to actively seek and accept comparable income opportunities. Failing to do so can result in a reduction of their entitlement to damages.

While fixed-term contracts may serve as valuable tools for businesses requiring temporary or project-based work from independent contractors, businesses must recognize that such agreements can expose businesses to considerable liability and risk. businesses should consult with experienced employment lawyers before implementing fixed-term contracts.

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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Due to ongoing pandemic-related uncertainty and what seems like daily regulatory changes, many organizations are shifting to non-traditional workplace structures. Employees are working from home, technology has become a cornerstone to keep teams connected, and businesses are frequently choosing to hire contract workers instead of building traditional employee/employer relationships. When it comes to employment law, one of the biggest risks for any disruptor of traditional workplace relations is the misclassification of employees and contractors (also known as gig workers). Think about Uber, Lyft, and SkipTheDishes and their use of gig workers. There have been many legal battles to figure out whether they are employees, independent contractors providing services, or dependent contractors. Do you know the difference?

Do you know the potential legal and financial pitfalls that can arise if you do misclassify your workers?

Whether businesses are ready or not, the gig economy is a rapidly growing part of the Canadian labour market in our uncertain COVID-19 driven economy. While businesses may reap financial benefits and benefit from short-term commitments, it also comes with a certain level of risk generally associated with unclear contracts and a lack of established boundaries. Before the COVID-19 pandemic hit, a 2019 report from the Canadian government showed the gig economy workforce increased by 70% between 2005 and 2016, from 1 million gig workers to 1.7 million. In Toronto, one out of ten workers depend on the gig economy for at least part of their income. Businesses use the gig economy to disrupt traditional employment models and to achieve tremendous financial success. In the face of COVID-19, many businesses are turning to gig workers as a way to survive. However, this strategy can carry high legal risk, and potential non-compliance costs can be devastating. On October 22^nd, Uber and Lyft lost a critical court case as reported in the New York Times,  when the appeal judge in California ruled that “When violation of statutory workplace protections takes place on a massive scale, as alleged in this case, it causes public harm over and above the private interest of any given individual.” However, Uber and Lyft have sought to change the rules of game by funding and successfully promoting Proposition 22, which unquestionably classifies workers as independent contractors rather than employees.  With $200 million in funding, it is no surprise that the ballot measure was passed in California with 58% support. It is a major win for businesses / huge disappointment to the gig workers, and an outcome that could affect other legal battles in the fight over employee rights in the gig economy.

In Canada, a business with profits driven by gig workers is not exempt from laws that govern the workplace. And no one will turn a blind eye just because of tough times brought on by COVID-19. Minimum employment standards cannot be violated or removed simply by putting someone on a “gig contract”.  An employee by any other name, be it a “contractor” or a “gig worker”, is still an employee. Note that even independent contractors can be deemed “dependent contractors”, a legal space that falls between independence as a full contractor, and dependence as an employee.

You might think you can create business/worker relationships within grey areas of employment laws, but these decisions will catch up to you.

Understanding What Dependent Contractors Are

Courts have recognised the rights of, and have provided protections for, contractors who are deemed to be dependent contractors, sort of a hybrid between a true independent contractor and an employee. Simply put, a dependent contractor has a right to notice of termination of their services – even during a pandemic. A business modeling their worker compensation on the ‘Gig model’ must be wary of potentially facing significant legal fees and damages, and even being forced to shut down.

For instance, in the case of Keenan v Canac Kitchens Ltd, the court awarded the workers $125,000 in damages, since they were found to be dependent contractors. An employer is not required to pay EI and CPP benefits or vacation pay for a dependent contractor. However, a dependent contractor is entitled to notice of termination, which can be the same as or close to an employee’s entitlement. The financial penalties of a court finding a contractor as a dependent contractor can be staggering, and one a business with slim profit margins or reduced operations due to the pandemic may not be able to bear.

Further, as reported in Forbes in 2015, Homejoy, an Uber-like home cleaning company, shut down citing multiple misclassification lawsuits from their independent contractors who argued they were actually employees. Creating more difficulties for businesses in the gig economy is that there is no uniform means of structuring the “gig” contract with the worker. There are as many different forms of “gig” work as there are businesses that have grown through the new gig economy. It’s worth noting that businesses who turn to gig workers out of necessity during the COVID-19 pandemic are often doing so without proper attention to the structure of the relationship and the contractor agreement itself.

How the Pandemic Has Affected the Gig Economy

Economic shutdowns due to the pandemic temporarily shut down certain gig worker services such as ride share workers, but it has also increased the need for other gig workers such as food delivery workers. Earlier this year, Canadian Foodora workers won the right to unionize and to be classified as dependent contractors and the company promptly pulled out of Canada. In August, former workers reached a $3.46M settlement with Foodora – a cost that the business was hoping to avoid.

With uncertainty comes temporary solutions to fill gaps. With so many businesses forced to shut down due to the pandemic, short term gig workers seem like a good temporary solution.

How To Protect Your Business From Risk

High profile legal challenges against companies like Uber and Foodora have been in the public eye, and businesses that rely on gig workers should think carefully about the risks. There are legal risks – and the ensuing costs – associated with misclassification of workers. The potential of such labour liabilities can also deter future investors that may be needed for both growth and exit strategies beyond the pandemic.

This is not to say that businesses can never have independent contractors. Prudent business risk management mandates proactive assessments be conducted upfront. This should include an assessment of the worker or services model if the business contemplates being ensconced in the “gig economy”.

If using independent contractors to provide services, the business must enforce policies to proactively maintain the independent contractor relationship. Businesses using the services of gig workers must take extra precautions to protect themselves from legal penalties more than their traditional employer counterparts. Fail to do so and the only “gig” in your company could be the “gig”antic payments to your improperly classified employees.

At Hum Law we work with you to proactively design policies to mitigate risks associated with your worker or employee contracts. If you want to make sure that you haven’t misclassified your workers or that your contracts are set up to protect your organizational rights, contact us today.

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