'It was a total failure to demonstrate the wrongdoing that was alleged'
The Alberta Court of Appeal has overturned a lower court’s finding that a worker under a management services contract was an employee, but it agreed that the contract was wrongfully terminated.
Many elements of the relationship may have led the lower court to see an employer-employee relationship, but the details of the contract showed a different reality, says Dylan Snowdon, an employment lawyer with Carbert Waite in Calgary.
“There’s a lot of factors here that could have easily made [the worker] look like an employee, but because they spelled them out so carefully in the independent contractor agreement, it was found not to be indicia of an employee,” he says. “It's interesting that they were so careful in their agreement that even though there were characteristics that might have gone the other way, because those indicies were specifically addressed in the contract, it actually helped them [define the contractual relationship] rather than hurt them.”
Multiple titles
The Camrose Regional Exhibition & Agricultural Society runs the Big Valley Jamboree in Camrose, Alta. Thomas Gerling joined the society as a volunteer and later joined its board, serving as its president for three years. He also spent time as the CFO of the society-owned limited partnership that operates the jamboree before serving as the society’s CFO, COO, and eventually CEO.
In September 2012, Gerling formed a corporation called Papa-T Productions, of which he was the sole director, shareholder, and employee. Papa-T entered into a management services agreement with the society in which Papa-T would provide business planning, development, operations, and marketing of the society’s activities, including the jamboree. The term of the agreement was for one year, which was renewed in 2013. Two-year renewals were signed in 2014 and 2016.
The agreement stated that Papa-T could engage in other business activities and the society make monthly payments. The society agreed to provide furnished office space, a vehicle allowance, and certain equipment, while Papa-T was responsible for its own expenses. The agreement also allowed the society to terminate at any time without compensation for breach of the agreement, active dishonesty, or “failure to provide satisfactory personnel.”
The agreement also stated that Papa-T was an independent contractor and any Papa-T employee would not be an employee of the society.
Contractor relationship warrants caution
This type of arrangement isn’t uncommon, but the advantages to the worker aren’t what they used to be due to changes to the Income Tax Act, says Snowdon. And employers have to be careful that the reality of the arrangement doesn’t maintain the employment relationship.
“I'm not a tax expert, but employees that presume there's a benefit to being an independent contractor could easily be mistaken,” says Snowdon. “Employers agreeing to this [arrangement] should probably be asking their worker, ‘Have you actually received tax advice?’”
“Also, just because the worker agrees to it doesn't mean that the [contractor] classification is going to stick, and a misclassification can result in big liability that the employer wasn't planning on.”
Read more: Shaw Communications violated the Canada Labour Code by treating two employees as independent contractors when they were really employees.
In 2017, Gerling convinced the jamboree’s general manager to retract an invitation to the 25th anniversary festival to a long-time organizer who had retired the previous year. Gerling believed that the individual had taken diesel fuel from the society without permission and submitted claims for his personal mileage, while also distributing complimentary festival tickets in exchange for a gym membership and rounds of golf.
The former organizer threatened to sue the society for defamation and the society decided to reinvite him. When Gerling found out, he declined to attend the 25th anniversary event in November.
On Jan. 2, 2018, the board terminated the management services agreement for cause, alleging several breaches of the agreement – providing false information to the general manager about the former organizer, the act of uninviting the former organizer “could have caused significant damage” to the society, Gerling’s skipping of the 25th anniversary event, and letting his personal feelings about the former organizer influence his decision-making.
Gerling and Papa-T sued for wrongful dismissal and breach of contract.
The trial judge found that Gerling was an employee of the society, Gerling’s actions didn’t breach the agreement, his misconduct was “a single incident of bad judgment” that didn’t warrant the termination of a long-term employee, and the grounds set out in the termination letter weren’t true.
The trial judge also found that the society’s allegations of untruthfulness and breach of fiduciary duties were based on “unfounded allegations of deceit” and its careless approach to the matter warranted aggravated damages. The society was ordered to pay Gerling more than $175,000 for the amount outstanding in the agreement, loss of benefits, and aggravated damages.
The society appealed the decision.
No employment relationship
The Court of Appeal noted that both parties intended for Gerling to work as an independent contractor and the agreement was clear. Papa-T was responsible for its own expenses and could carry on other business activities, and the agreement stated that there was no employment relationship. In addition, the society never made employment deductions for Gerling and it paid Papa-T, said the appeal court in finding that Gerling was in fact an independent contractor.
While some of the elements led the trial judge to view the relationship as that of employer-employee – the society provided the office, a vehicle, and most of the equipment to do the job – an important factor that swayed the appeal court in the opposite direction was that all of those things were specifically outlined in the contract, says Snowdon.
“The appeal court did a more thorough analysis of all of the indicia that they're supposed to look at,” he says. “I thought it was interesting that the appeal court said that office space, administrative support, and computer requirements weren't actually just being provided to him – it was part of the contractor agreement between the society and Papa-T.”
“And so the fact that Gerling got to use [them] as a Papa-T employee wasn't actually an example of him using the company's tools.”
Read more: Case law is littered with contracts that were declared unenforceable, writes employment lawyer Melanie Samuels.
The appeal court did, however, agree with the trial judge that Gerling’s retraction of the invitation didn’t constitute a material significant breach required to terminate the agreement. It didn’t go to the root of the contract, so the society’s termination amounted to a breach of the agreement, said the appeal court.
The court found that Gerling’s decision to disinvite the former organizer was made because Gerling felt he had stolen from the society and it was in its best interests.
Snowdon notes that just cause for dismissal of an employee has a higher bar than termination of an independent contractor, but in this case it didn’t matter because the society didn’t meet either standard.
“It was a total failure [by the society] to demonstrate the wrongdoing that was alleged,” he says.
As for aggravated damages, the appeal court overturned this part of the award, finding that damages arising in the manner of dismissal only apply in the context of an employment relationship, not for breach of a commercial contract.
The appeal court upheld the damages for the balance of the contract and loss of benefits and overturned the aggravated damages award. This reduced the amount that the society was ordered to pay to just over $147,000.
The nature of the relationship, whether that of employment or an independent contractor, may affect the damages in a wrongful termination suit, but Snowdon cautions that the lesson for employers is similar for either situation.
“If you are asserting a breach of contract, whether it's an employee or an independent contractor, it's important to inform yourself fully before making a final decision,” he says. “So rather than leaping to termination and then investigating things, one can investigate first – which may involve suspending an employee or independent contractor during the course of an investigation if there's been some accusation of wrongdoing.”
“But here [the society] made the accusation of wrongdoing and then completely failed to prove that that was the case, which makes it seem like they made their decision before they actually did a complete review of the circumstances.”
See Gerling v. Camrose Regional Exhibition & Agricultural Society, 2022 ABCA 210.
