'If it walks like a duck and quacks like a duck, I don't care how you pay the guy'
“The distinction between a dependent contractor and an independent contractor is subtle, because a lot of it's the same test, but it's different,” says Barry Fisher, a mediator and arbitrator of employment and labour relations matters in Toronto.
However, Fisher is scratching is head over a recent decision by the Ontario Superior Court of Justice that found a worker was an independent rather than a dependent contractor for an Ontario company, despite the company’s apparent significant level of economic and practical control over the worker.
Thomas Lynn, 63, started working as an employee for The Westport Telephone Company (WTC), a provider of telecommunication services in eastern Ontario, in 1977. WTC was owned by Thomas’ brother, Steve. Thomas worked for WTC as an employee until 1996, holding the title of president for nearly 15 years and vice-president starting in 2010. That year, at the advice of his accountant, Thomas incorporated 1159273 Ontario Inc. (115) to hold his shares in WTC and receive compensation from WTC. 115 began providing services to WTC as an independent contractor, although WTC didn’t formally terminate Thomas’ employment.
After 115 was incorporated and began providing services to WTC, Thomas retained his title of director of technical services with WTC, worked full-time for WTC, was responsible for managing and disciplining WTC employees, and followed WTC’s policies. Thomas used a laptop, cellphone, and vehicle owned by 115, but also maintained an office at WTC’s workplace and used WTC’s tools, equipment, and support staff.
Read more: A dependent contractor deserved $10,000 in lieu of notice after signing an ‘unconscionable’ agreement.
Thomas also remained an officer and director of WTC, and he held shares in WTC as well as other ancillary companies that WTC owned. WTC paid 115 through monthly invoicing, which was for the same amount each month, regardless of how much Thomas worked.
Starting in 2018, Thomas offered to sell his WTC shares to his brother Steve, but they couldn’t agree on the particulars. As a result, Thomas sold the shares to a third party in September 2019. Although Steve told him that he didn’t want the third party as a shareholder, Thomas proceeded with the sale at a reduced price.
Thomas assumed that he could continue offering his services to WTC, but WTC offered an independent contractor agreement for the provision of technical services and no management responsibilities that he didn’t accept. WTC wrote a letter to 115 advising that Thomas’ services through the corporation would no longer be required after Aug. 31 due to the sale of the shares.
115 filed a claim for wrongful dismissal, arguing that it was a dependent contractor entitled to damages for wrongful dismissal.
Some economic dependence
The court found that while 115 had some economic dependence on WTC – particularly from 2011 to 2019, when 115’s billings from WTC ranged from more than 80 percent to 100 per cent – the corporation did not have a high level of exclusivity because from 1996 to 2010, WTC billings ranged from 52 to 71 per cent with the balance going to the ancillary companies.
The court referred to an Ontario Court of Appeal decision that established that “near-exclusivity” to determine dependent contractor status required “substantially more than 50 per cent of billings.”
Fisher sees problems with how the court determined that 115’s income was not exclusive to WTC, despite the close ties between the other sources of income.
“The troubling part is when [the judge] looks at economic exclusivity, it's very difficult to understand the back and forth – he said a certain percentage of [115’s] income came directly from [WTC] and the other percentage came from other income,” says Fisher. “He looked at the income from [WTC], and from what he calls affiliated companies, but then he makes a note that all the affiliated companies are basically part of the same empire as [WTC] subsidiaries. And so he's making this completely artificial, legal distinction that we normally don't do an employment law.”
“When you look at it on a holistic basis, if all the other income was coming from affiliated companies, in economic reality, 100 per cent of his income came from the relationship with his brother,” he says.
Read more: The Ontario Court of Appeal found that a lawyer who lost a client who accounted for 40 per cent of business wasn’t dependent on that client.
The court acknowledged that WTC had some control over Thomas’ time, but since 115’s income from WTC was less than 72 per cent from 1996 to 2010, it wasn’t enough to make 115 dependent. In addition, WTC didn’t tell Thomas to incorporate and become a contractor and it was Thomas’ choice to work in WTC’s main office – there was no evidence that he was required to work there, said the court.
The court also found that 115 was never on WTC’s organizational charts, although Thomas was in his role as director of technical operations and vice-president. This kept the corporation at arm’s length rather than integrated, the court said.
Fisher questions the court’s evaluation of 115’s economic dependence on WTC, wondering why the percentage of 115’s revenue from WTC wasn’t averaged over the entire period of 1996 to 2019, rather than focusing on the years where it was lower – which were still more than half – and why so much attention was paid to the structure of WTC and the corporations rather than the reality of the relationship.
“In employment law, we tend not to look at the corporate structure issue so much – [the court] was obsessed with the fact that the arrangement was set up with professional advice and therefore it was not forced upon [Thomas], but that's never been one of the criteria,” says Fisher, noting that Thomas was an employee for many years and the only thing that really changed was how WTC paid him.
“If it walks like a duck and quacks like a duck, I don't care how you pay the guy – that's never been a factor in determining whether someone is an independent or dependent contractor.”
The court determined that 115 was an independent contractor and therefore not entitled to wrongful dismissal damages.
It’s a bit of a confusing decision for employers in trying to figure out what makes a dependent contractor, says Fisher, but he notes that there’s one thing they should remember in such a relationship – common law notice of termination applies, but there are no minimum standards as there would be for employees.
“If you have a dependent contractor and you have a clause that says either party can terminate this relationship on 10 days’ notice, it's totally enforceable because they're not employees under the ESA and the common law is a presumption which can be rebutted by an express agreement,” says Fisher.
See 1159273 Ontario Inc. v. The Westport Telephone Company Limited, 2022 ONSC 1375.
