'Misclassification, intended or not, can be costly'

“Misclassification of workers, whether intended or not, can be costly for employers.”

So says Haadi Malik, an employment lawyer at Stringer LLP in Toronto, after an Ontario company incorrectly treated a worker as an independent contractor and was on the hook for the remaining four months of a fixed-term contract, despite a termination clause that also turned out to be invalid.

“This case dealt with common law notice, as well as statutory entitlements to vacation pay, to which the independent contractor-deemed-an-employee was entitled, but there can also be issues such as overtime pay and holiday pay, if applicable under the [Employment Standards Act (ESA)],” says Malik.

“There maybe another potential risk for employers with respect to misclassification – if a statutory complaint is filed under the ESA with the Ministry of Labour – because the ESA prohibits such misclassification and there may be penalties levied on that basis.”

Termination clause

The worker joined Fusion Nutrition, a distributor and wholesaler of bodybuilding supplements based in Guelph, Ont., in September 2020 as head of global sales reporting directly to the CEO. Six months later, they agreed to a written contract – for a fixed term until March 15, 2022 – that provided for a fixed monthly payment and car allowance, as well as expenses.

The contract identified the worker as an independent contractor, specifying that the worker was providing his services “not as an agent or employee unless this agreement is replaced by an employment agreement.” It also stated that the worker wasn’t qualified to participate in or receive any employee benefits.

The contract also had a termination clause that allowed for termination for cause without any further payments or termination without cause with 30 days’ notice, for which Fusion would provide fixed payments for four months after the date of termination.

The worker was able to provide services to other clients, as long as they weren’t direct competitors with Fusion and it didn’t interfere with the worker’s contractual obligation to Fusion.

The worker had his own office at Fusion’s head office and reported to work around the same time each day, working until all assigned work was completed. He didn’t have anyone reporting to him, but he was required to identify himself to customers as representing Fusion.

Locked out of office

The worker alleged that Fusion regularly failed to pay him on time. On Aug. 18, 2021, Fusion locked him out of the office and didn’t contact him afterwards. The worker took this to be a termination of the contract. On Sept. 1, Fusion deposited about one-and-a-half months’ pay into the worker’s bank account, which turned out to be his final pay.

The worker filed an action claiming that he was an employee, not an independent contractor, and the termination clause of his contact breached the Ontario Employment Standards Code. As a result, he claimed entitlement to damages equal to the balance of the fixed-term contract.

An Ontario employer that constructively dismissed a worker in the first year of a 10-year contract had to pay out the remaining nine years – totalling $1.3 million.

Nature of employment relationship

The Ontario Superior Court of Justice noted that the fact that the contract identified the worker as an independent contractor meant little, as it was the nature of the relationship between the parties that mattered. This would be determined by looking at the level of control Fusion had over the worker’s activities.

The court referred to the Ontario Court of Appeal’s summary of the principles originally set out by the Supreme Court of Canada used to determine the nature of the contractual relationship, including whether or not:

• the worker was limited exclusively to the service of the company
• the worker was subject to the control of the worker
• the worker had an interest in the tools used in his work
• the worker has any business risk or expectation of profit
• the worker’s activities are part of the company’s business organization.

The court found that the worker’s primary source of income was from Fusion, he worked full-time hours out of Fusion’s head office, he reported to the CEO, and he had to identify himself as a Fusion representative. This indicated that his work activities were controlled by Fusion and he had no opportunity for profit or assumed any risk. While the worker technically could have other clients, the limits placed on him with work hours the prohibition of working with competitors and made it almost impossible to do so, said the court.

The court determined that the exclusivity of the relationship and the worker’s economic dependence made the worker either an employee or dependent contractor and therefore entitled to notice of termination.

Ontario courts haven’t found a duty to mitigate for workers terminated from fixed-term contracts, but Western Canadian courts disagree.

Control over the worker

Key to the court’s determination of the worker’s status were Fusion’s control over the worker and the financial interdependence between them, says Malik.

“[There was] a variety of specific factors that helped make the finding that this worker was indeed an employee,” he says. “The court noted that the [worker's] primary source of income was [Fusion], he worked full-time at the head office five days a week, and his work was dictated and controlled by the employer.”

Also important was the fact that the worker didn’t have the opportunity to profit from the performance of his work, a key element in determining the employment relationship, says Malik.

“It's not like he was running his own business where he had various clients – though the court did note that he had the opportunity to have other clients, but none that could be in direct competition with [Fusion],” he says. “He could not do work that could interfere with his work or compete with [Fusion], which essentially meant that his service was restricted, effectively, primarily to the [Fusion’s] business.”

As for the termination clause, the provision for termination for cause without any further payments was a problem, as the ESA required termination pay for all terminations, even just cause, except for employees guilty of “wilful misconduct, disobedience, or wilful neglect of duty that is not trivial or condoned by the employer.” The termination clause did not restrict the denial of termination pay to wilful misconduct – a higher standard than just cause – and therefore allowed Fusion to terminate the worker for cause without complying with statutory obligations, said the court.

A job offer that refers to a length of time for an assignment may be considered a fixed-term contract absent a clear termination provision, the Alberta Court of Appeal has ruled.

Termination clauses read as a whole

Using the established principle that termination clauses must be read as a whole, the unenforceable without-cause termination provision made the entire clause unenforceable and left the termination subject to the common law, said the court.

Malik notes that Ontario courts take a stringent approach to the interpretation of termination clauses, as was the case here with the termination-for-cause provision.

“For an employee to be terminated for culpable reasons and to be denied notice or pay in lieu thereof, “it's a very high standard [of wilful misconduct],” says Malik. “Anytime an employment contract says something along the lines of ‘You may be terminated for cause’ and denies them notice for circumstances not allowed for under the ESA, the termination for-cause clause is invalid.”

That stringent approach includes the wiping out of all termination provisions in a contract if one of them is unenforceable, adds Malik.

“This is because of a seminal decision of the Ontario Court of Appeal, Waksdale v. Swegon North America [2020 ONCA 391], which essentially says that termination language in employment contract is to be read as a whole,” he says.

Misclassifying employees as contractors exposes potential liability under employment standards legislation for employers, according to employment lawyers.

Balance of contract

The court recognized that, absent any valid provisions stating otherwise, notice entitlement for a fixed-term contract is the balance of the contract. As a result, Fusion was ordered to pay the worker damages for wages for the balance of the contract, along with remaining unpaid wages and vacation pay.

Although the worker claimed punitive, aggravated, bad-faith, and moral damages for psychological injury from being locked out of the office, the court found insufficient evidence to support such damages. The total award was just over $64,000.

“Language anywhere in the employment contract denying an employee notice of termination, or pay in lieu thereof, on the basis of just cause will be fatal and should be removed,” says Malik. “Avoid this typical booby trap not only in termination clauses but also in other parts of the agreement. Not doing so could be quite costly later down the line.”

See Baker v. Fusion Nutrition Inc., 2022 ONSC 5814.