Independent contractors can have their cake and eat it too

Decision a 'dangerous blow' to employers

A decision by the Federal Court of Appeal has left employers scratching their heads about the status of independent contractors.

In Dynamex Canada Inc. v. Mamona, the court deemed independent contractors to be employees under the Canada Labour Code and allowed them to recover holiday and vacation pay as employees. This means independent contractors can effectively have their cake and eat it too because in this case they got the benefit of independent contractor status from the Income Tax Act while being able to claim employee status under the code.

The Appeal Court was asked to review a judgment dismissing an application for judicial review of a decision of a referee. The issue in the appeal was whether the respondents were employees of Dynamex from 1997 to 1999.

The respondents — Adele Mamona, Randolph Hepner and Robert Cyr — provided courier, messenger and delivery services under individual contracts with Dynamex. The contracts were not identical but had many common features, including a specific statement that they were independent contractors. Under the contract, the respondents:

•were required to wear uniforms leased from Dynamex;

•provided their own vehicles which were decorated with Dynamex logos and trademarks at their own expense;

•licensed, insured and maintained their own vehicles at their own cost;

•were to display no other advertisements on their vehicles except with the consent of Dynamex;

•were responsible for all cargo losses and were required to contribute to a claim fund or obtain insurance for that purpose;

•were required to lease a mobile radio unit from Dynamex;

•used a customer base provided by Dynamex;

•were paid commission based on the amounts invoiced to customers. Dynamex bore the risk of non-payment by its customers but deducted a percentage for “bad debts”;

•were required to be bonded at their own cost;

•were required to use waybills and other forms supplied by Dynamex;

•worked under contracts that had no set term and could be terminated by either party on written notice; and

•accepted that work was allocated at Dynamex's discretion.

The respondents were expected to be available between 8 a.m. and 6 p.m. except weekends and statutory holidays, but received vacation time when requested. They worked in a combination of regularly scheduled runs and ad hoc assignments, could set their own priorities for deliveries and were free to refuse deliveries without negative consequences.

Mamona and Cyr believed they were not allowed to work for anyone else while their contracts were in force. Mamona’s contract contained a restrictive covenant precluding her from participating in any courier or delivery business in Winnipeg if her contract was terminated. There were restrictive covenants in the other contracts, but they were not as onerous. Only Cyr’s contract precluded him, during the term of his agreement, from working as a courier elsewhere.

All of the respondents filed their income tax returns on the basis they were self-employed and claimed vehicle expenses and deductions. Dynamex did not deduct for income tax, Employment Insurance or Canada Pension Plan but took deductions for Workers’ Compensation, mobile radio lease payments, bonding costs, cargo insurance and uniform rental. Dynamex did take some disciplinary action to curtail behaviour it considered unacceptable.

In 1998 the Canadian Union of Postal Workers was certified as the bargaining agent for Dynamex owner and drivers, including the respondents. During this period of certification, the respondents decided to assert a claim for vacation pay and holiday pay on the basis they were employees and not independent contractors. They filed the complaints under the Canada Labour Code.

The complaints were investigated by an inspector who concluded the complaints were well founded. On June 15, 1999, the inspector issued a payment order for each respondent. Dynamex submitted an appeal. A referee rendered a decision confirming the payment order.

The referee said a person is an employee for the purposes of the code only if she is an employee under common-law principles. He rejected the respondent’s argument that a person who meets the definition of “dependent contractor” in the code, and is thus considered an employee, should automatically qualify as an employee.

The referee acknowledged the inconsistency of the respondents’ claim as employees because they had previously been parties to contracts in which they were characterized as independent contractors and benefited from that status. He found the facts pointed to a relationship that was more akin to employment than entrepreneurship.

Dynamex appealed. In upholding the referee’s decision, the Federal Court of Appeal found that in the determination of whether a person is an employee or an independent contractor the terminology used in a contract is not determinative. The actual relationship between the parties will supersede any contractual terms. It also acknowledged the referee’s finding that where the employment status of an individual is ambiguous, that individual may find it advantageous to take inconsistent positions in different proceedings. The respondents’ claim for holiday and vacation pay was successful.

This decision is a dangerous blow to employers. While the decision is based on a balancing of the facts, neither the referee nor the Appeal Court addressed the inherently unfair result of an individual claiming to be an independent contractor and using that status to benefit from the Income Tax Act and at the same time claiming to be an employee and benefiting from that status under the code. This decision offers no guidance on resolving future disputes and in its own way encourages ambiguity in the working relationship in order to take advantage of this inconsistency.

In order to avoid a finding that an independent contractor is an employee, employers should note that: a contractual clause designating a party as an independent contractor is not determinative; and putting too many restrictions (such as forcing them to lease vehicles and other equipment from the employer or forcing them to devote all of their time to one employer) can lead to a finding that they are an employee and not an independent contractor.

For more information see:

Dynamex Canada Inc. v. Mamona, [2003] F.C.J. No. 907, FCA

Heena Mistry is a lawyer with Jesin, Watson & McCreary in Toronto. She can be reached at (416) 226-0055 or hmistry@jwm-law.com.

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