Determining whether a worker is an independent contractor or an employee isn’t easy. There’s no magic formula to apply, no single clear-cut question that can be asked. But what is clear is that courts don’t care what the employer calls the worker. It’s how the worker is treated that will ultimately decide whether the employment relationship is truly that of an independent contractor. Stuart Rudner takes an in-depth look.
The point of the quote above, which I could never make as eloquently as Shakespeare, is that it doesn’t matter what you call something. Calling it by a different name does not change its fundamental nature, or make it something different. To use another, perhaps less eloquent, quote: “If it walks like a duck and quacks like a duck, you can be reasonably sure it is a duck.”
While this may seem a bit more philosophical than the usual article, it has a practical application. In the employment law context, this concept arises often when one deals with purported “independent contractors.” In many cases, they are nothing but employees with a different name.
Following Shakespeare’s lead, our courts will not blindly accept the label that is placed on a relationship. Even if the parties say they have an independent contractor relationship, the courts will look behind that to determine what the reality of the situation is. And if it is an employment relationship, then the parties will have all of the rights and obligations that flow from such a relationship.
Parties try to avoid the “employer-employee” relationship for a variety of reasons. From the employer’s perspective, they may be trying to avoid the obligation to provide medical and dental benefits, withhold taxes, pay workers’ compensation premiums or provide relatively onerous notice of termination or pay in lieu thereof. The individual may be seeking the more advantageous tax treatment available to a business owner, as opposed to an employee.
For decades, courts have struggled to distinguish employees from independent contractors. In most cases, the issue arises when the relationship comes to an end. Up to that time, the parties are typically quite content with the relationship they have created and the advantages it can provide.
However, when the organization decides to end the relationship as they would with a true independent contractor (and, therefore, with far less notice than would be due to an employee), the “contractor” frequently decides she no longer wants that designation. The contractor alleges she was truly an employee and therefore entitled to reasonable notice of termination.
In recent years, the courts have acknowledged the difficulty in labelling everyone either an employee or a contractor. In many cases, the tests and relevant factors are inconclusive — some suggest an employment relationship exists while others suggest more of an independent contractor relationship. The courts have begun to abandon this approach. Rather than an all-or-nothing, black-and-white approach dichotomy, some courts have said that workplace relationships exist on a continuum, with an employment relationship at one end and an independent contractor relationship at the other. The closer to an employment relationship, the lengthier the period of notice of termination.
This summer, the issue came up in the Ontario case of Braiden v. La-Z-Boy Canada Ltd. The background is as follows:
Gordon Braiden joined La-Z-Boy in 1981 as a customer service manager. In June 1986, he became a sales representative trainee and, in August 1987, he became a commissioned sales agent. Officially, his employment with La-Z-Boy ended at that time as commissioned sales agents were treated as independent contractors.
In 1995 La-Z-Boy decreed all commissioned sales agents would have to sign written agreements. Braiden did so. Two years later, in the fall of 1997, Braiden was asked to meet with his superior to discuss the need for incorporation. In essence, La-Z-Boy wanted the contractors to incorporate in order to further separate them from La-Z-Boy and make them even less like employees.
The intent of these changes was to transfer financial obligations from La-Z-Boy to Braiden and to attempt to establish the status of independent contractor for purposes of termination of the contract and avoidance of reasonable notice thereof. It would also allow La-Z-Boy to avoid paying the employee health tax and workers’ compensation premiums. As requested, Braiden formed a corporation and signed a new agreement with La-Z-Boy on its behalf.
Throughout his time as a salesman, Braiden was precluded from selling competing lines of merchandise and could only sell non-competing merchandise with La-Z-Boy’s permission. He paid all of his own expenses, including office and staff. La-Z-Boy determined his sales territory (which it changed over time), required that he keep records as they deemed appropriate and report to them on their specific forms. He did not receive any benefits. He had full control over his hours and activities, although he was subject to sales quotas. When La-Z-Boy became dissatisfied with his performance, a plan for correction was prepared.
In November 2003, La-Z-Boy advised Braiden the relationship would end by providing him with 60 days notice, as required by the agreement in place. Braiden was shocked. La-Z-Boy also prepared a draft notice to dealers, which stated that Braiden would no longer represent La-Z-Boy as he had chosen to change his career path. Throughout the termination, La-Z-Boy referred to Braiden personally, not the corporate entity with which it had contracted.
At the time of termination, Braiden was 54. He had been with La-Z-Boy, either as an employee or contractor, for about 23 years.
Braiden sued both in his name and in the name of his corporation, claiming he was really an employee of La-Z-Boy and therefore entitled to more notice of termination than the 60 days provided to him. The trial judge followed established law and did not allow himself to be bound by the description of the relationship chosen by the parties.
“It is clear that applying a label of ‘independent contractor’ will not be determinative of the character of the relationship,” the trial judge said. Rather, he held that one must look at the conduct of the parties to each other.
The trial judge took note of a number of factors, including the fact that:
•every agreement required Braiden’s personal participation as a necessary principal of the corporate entity;
•La-Z-Boy would only compensate Braiden’s corporation when Braiden was actively involved in the performance of the duties;
•La-Z-Boy set the level of compensation;
•La-Z-Boy was solely responsible for sales and promotional activities, and required the co-operation of Braiden;
•La-Z-Boy required that Braiden service its customers in his territory;
•La-Z-Boy restricted Braiden’s ability to sell other products;
•Braiden had to attend trade shows as directed by La-Z-Boy;
•Braiden had to attend meetings as directed by La-Z-Boy; and
•Braiden’s corporation had to participate in the group health and insurance benefit plans provided by La-Z-Boy but paid for by Braiden’s corporation at its own expense.
Justice Sills did not review the various tests courts have traditionally used to distinguish employees from contractors. He noted that, over the years, a third category of relationship has developed, separate from employee/employer or independent contractor, where reasonable notice of termination is required. He quoted the British Columbia Court of Appeal, which in turn relied on several Ontario Court of Appeal decisions, for the proposition that relationships in the workplace exist on a continuum, with the employer/employee relationship at one end and independent contractor at the other. The notice requirement is based upon where the particular relationship falls along the continuum.
Having reviewed the facts, he found that: “Given the extent of control held and exercised by the defendant regarding the functions and activities of the plaintiffs, the annual agreements, although said to be agreements with an independent sales and marketing consultant, represented an employment relationship between the defendant and Gordon Braiden, either directly or through the plaintiff corporation.”
Justice Sills awarded Braiden 20 months’ notice.
This case, and other recent decisions on this issue, should serve as timely reminders to organizations that choose to set up independent contractor relationships. What you label the relationship will not be conclusive; the courts will look behind the label to determine the reality of the situation. And if your “independent contractor” is deemed to be an employee, you might be on the hook for retroactive statutory deductions, plus interest, plus accrued vacation and other benefits. In addition, of course, your obligations at the time of termination will be far more substantial than you may have bargained for. In many cases, it is more prudent to simply call employees what they are, rather than trying to get away with one.
For more information see:
• Braiden v. La-Z-Boy Canada Ltd., 2006 CarswellOnt 4201 (Ont. S.C.J.)
Stuart Rudner is a partner who practices commercial litigation and employment law with Miller Thomson LLP’s Toronto office. He can be reached at (416) 595-8672 or by e-mail at email@example.com.