Independent consultant’s role with home builder changed from original 1987 contract: Court
A contractor relationship is different from an employer-employee relationship, but sometimes the two can merge over time. This can lead to a company being caught off-guard when it discovers it has an employee it didn’t know it had. An Ontario company that terminated its relationship with a sales representative under a contract signed 18 years earlier found this out when the courts found it was on the hook for pay in lieu of notice far greater than the terms of the original contract.
Elizabeth McKee, 68, signed a sales and advertising agreement with Reid’s Heritage Homes, a home builder based in Cambridge, Ont., on Jan. 8, 1987. McKee signed the agreement on behalf of her consulting business. Under the agreement, Reid’s would provide 69 homes in Guelph, Ont. for McKee to advertise and sell. She would receive $2,500 for each home sold.
The contract included an exclusivity clause in which McKee’s company would only work with Reid’s unless Reid’s allowed it to another company owned by Reid’s owner. There was also a termination provision stipulating either party could end the agreement with 30 days’ notice.
McKee sold the 69 homes within the year and Reid’s continued to provide homes for her to sell. Reid’s also began supplying her with company stationery and forms and began calling her its sales manager. McKee hired some assistants on her own and paid them from the commissions she received from Reid’s.
New reporting relationship
In 2000, Reid’s owner died and the company was taken over by the owner’s son-in-law. Things continued as they were until 2004, when Reid’s hired a corporate sales manager to whom all commissioned agents, including McKee, would report. In February 2005, the owner told McKee she and her assistants would work for Reid’s directly and they would work out a new contract with a guarantee of 100 lots per year to sell. However, the new manager refused to give McKee that guarantee and after she didn’t agree to terms, Reid’s offered her a standard employee contract with a 14-day termination notice provision.
The inconsistency in Reid’s approach and the perceived animosity in the contract offer made McKee feel uncomfortable and she felt she should look for employment that wasn’t time-limited. She began selling homes for another builder and sued Reid’s for wrongful dismissal.
The Ontario Superior Court of Justice initially found the original agreement between McKee’s company and Reid’s was “spent” once she sold the 69 homes specified in the agreement. However, since they continued their relationship and McKee continued to sell homes for Reid’s and nobody else, the court found there was a “tacit agreement” she would work exclusively for Reid’s.
The court also found since McKee worked exclusively for Reid’s selling homes, which was Reid’s “most integral part” of its business, she was not a contractor but rather an employee of the builder. Because of the length of her service and age, the court ruled McKee was entitled to 18 months’ pay in lieu of notice.
Reid’s appealed the decision, arguing McKee was not an employee but rather an “dependent contractor,” which was defined in the Ontario Labour Relations Act as an intermediate category where a contractor depends financially on a business and has a relationship similar to that of an employee but still different. It said the 30-day notice period in the original contract should have continued to apply since the relationship was unbroken. The company also pointed out it offered McKee another position after the contract dispute but she refused.
The Ontario Court of Appeal agreed dependent contractors were a legitimate category, but said they are owed reasonable notice of termination just as full employees would be. Regardless, the court agreed with the trial court’s finding that McKee was in fact an employee of Reid’s.
Status changed to in-house agent
Both courts found Reid’s gave more specific tasks to McKee when the new sales manager took over to supervise her. Reid’s oversaw advertising and pricing responsibilities, leaving McKee to do the “sort of specialization of tasks that one expects to find with respect to an in-house agent rather than an independent, or even dependent, realty firm.” McKee used Reid’s facilities and tools with little risk of her own capital, all characteristics of employee status, said the court.
Though McKee hired her own staff and communicated Reid’s directives to them herself, the court said this was typical of many chains of authority within organizations, particularly sales, that involved managers and staff within a division. In addition, though she operated her own business at the beginning of her relationship with Reid’s, her status changed over 18 years and her interaction with Reid’s business was notably different than when she signed the original contract in 1987.
In addition to upholding the trial court’s finding that McKee was an employee of Reid’s, the appeal court also agreed she was entitled to 18 months’ notice. Since relations between McKee and Reid’s deteriorated when the new manager took over and the company offered her a different contract than what was discussed, the court found the relationship had “drastically” changed and irreparably damaged. As a result, McKee wasn’t required to mitigate her damages by accepting another position with Reid’s.
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