When is a contractor an employee?

Recent Alberta case identifies tests used to determine whether a worker is an employee or an independent contractor

Brian Kreissl
Several tests have been developed and used by the courts over the years to determine whether an individual is truly an employee or an independent contractor. While some of these tests have fallen out of favour to some extent, a recent case in Alberta suggests that, rather than looking at only one or two of these tests in isolation, courts can apply all of these methodologies simultaneously to determine whether a worker is an employee or a contractor.

Following the case of Marbry v. Avrecan International Inc., courts have been moving away from the strict employee/contractor dichotomy and have begun to recognize that, as the British Columbia Court of Appeal in Mabry stated: "All relationships in the workplace fall on a continuum. At one end of the continuum is the employer-employee relationship where reasonable notice to terminate is required. At the other end of the continuum are independent contracting or strict agency relationships where notice is not required."

Notwithstanding the recognition of these intermediate contractual relationships by some judges, there are still important distinctions to be made between employees and independent contractors under the law in several areas such as: income tax; vicarious liability; wrongful and constructive dismissal; EI premiums; worker's compensation; and (depending on the jurisdiction) employer health taxes or employee health premiums. Important practical considerations may also include eligibility for benefits, pensions and incentive pay, as these elements of an organization's total compensation package are normally not offered to contractors.

In 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., the Supreme Court of Canada held that "no single conclusive test exists to determine whether (a) worker is (an) employee or (an) independent contractor."

That may be so, but judges over the years have been free to use any one of the different tests used to determine whether an arrangement is one of employment, a contract for services between two businesses or some type of quasi-employment contract that falls somewhere in the middle.

It seems sensible that no one test should be used and applied in determining a worker's status, especially given the complexity of many work arrangements and the increase in contingent and self-employment in Canada over the past two decades. The courts have started to extend some employment-related rights to contractors that were previously only enjoyed by "employees" in the true sense of the word. What is not ideal, however, is that there is still a certain amount of inconsistency in terms of which tests an individual court is likely to apply when determining whether or not a worker is an employee or a contractor.

Therrien v. True North Properties Ltd. was a constructive dismissal case involving a chartered accountant whose hours were reduced as a result of his employer’s financial difficulties. It was determined by the Alberta Court of Queen's Bench that Hector Therrien was in fact an employee and could therefore claim damages for wrongful dismissal, even though his remuneration was paid to his professional corporation rather than directly to him (for more on the Therrien ruling, see sidebar).

In reaching her decision in the Therrien case, Justice D.A. Sulyma reviewed several of the tests applied over the years for determining whether an individual is an employee or an independent contractor. These included:

The control test. Citing the Supreme Court of Canada case of Cooperators Insurance Association v. Kearney, Justice Sulyma stated: “(The control test) mandates considering whether a person alleged to be an employee is subject to the control and direction of the employer in respect of the manner in which his work is to be done, when it will be done and how the employee must do his work. If the employer possesses the power to direct both what tasks the employee should perform and the manner in which it is to be done, then that individual is an employee.”

The fourfold test. This was the test from the old Privy Council case of Montreal (City) v. Montreal Locomotive Works Ltd., where Lord Wright adopted a “fourfold test” (also referred to as the "entrepreneur test"), requiring a court to examine the issues of control, ownership of the tools, chance of profit and risk of loss”.

The organization test. This test “involves the court determining whether the individual's work is an integral part of the business operation of the employer or only accessory to it. The more integral the work, the more likely the individual is an employee.” This test had been applied by the Ontario High Court in the case of Armstrong v. Mac’s Milk. The court found a worker was an employee of Mac’s Milk even though he was paid for pasting window decals on a per store, as opposed to an hourly, basis. A customer slipped on ice outside the store, which was caused by the worker spilling water while pasting decals in very cold weather. He was negligent in not arranging to have the resulting ice patch salted. Because the worker was deemed an employee, the store was held vicariously liable for his negligence.

“(The worker) was certainly under the control of Mac's Milk as to where the work should be done and as to how it should be done and his work was done as an integral part of the business of Mac's Milk,” the court said.

The four factors of employment test. In Talbot v. Pan Ocean Oil Corp., the court identified the following four factors of employment:
• the power of selection of employees;
• the payment of remuneration;
• the right to control the method of doing work;
• and the right to discharge.

“I conclude by all of the tests enunciated that the relationship between the parties was one of employment,” Justice Sulyma said in her decision in Therrien.

Therrien seems to be saying that courts can use all four of the above tests to determine the true status of a worker. This approach may not be entirely new (the Supreme Court of Canada also looked at several different tests in Sagaz Industries, even though it was decided in the end there is no single conclusive test to be applied in these types of cases), but, ultimately, it remains to be seen if more judges take the same approach as in Therrien.

For more information see:

Therrien v. True North Properties Ltd., 2007 CarswellAlta 612 (Alta. Q.B.).
Marbry v. Avrecan International Inc., 1999 CarswellBC 589 (B.C. C.A.).
671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 CarswellOnt 4155 (S.C.C.).
Cooperators Insurance Association v. Kearney, 1964 CarswellOnt 72 (S.C.C.).
Montreal (City) v. Montreal Locomotive Works Ltd., 1946 CarswellQue 231 (Que. P.C.).
Armstrong v. Mac’s Milk, 1975 CarswellOnt 364 (Ont. H.C.).
Talbot v. Pan Ocean Oil Corp., 1980 CarswellAlta 8 (Alta. Q.B.).

Brian Kreissl is the managing editor for Consult Carswell. He can be reached at (416) 609-5886 or [email protected].


Accountant who worked exclusively with company was an employee, court rules

Hector Therrien, 57, was a chartered accountant from 1976 to 2000. In 1999, he received an offer from Gaetan Gagnon to provide accounting and financial advisory services exclusively to his company. Therrien sold his partnership and began working for Gagnon on Jan. 1, 2000.

Therrien and Gagnon had an agreement where Therrien would be paid $12,000 per month and get six weeks of vacation a year. Therrien indicated he expected to work another 10 years until his retirement, which Gagnon told him fit with his own plans.

However, in December 2000, Gagnon’s companies were experiencing financial difficulties and he had to terminate several staff. He told Therrien he could work until May 1, 2001 and “after that we’ll employ you on an as needed basis.” Therrien took this to mean his employment would end on May 1, 2001. Therrien sued for constructive dismissal.

The court found given Therrien’s age and the fact he left a long-time practice to work for Gagnon, it was reasonable to assume he wouldn’t have agreed to the arrangement unless he expected it to be long-term. While other contractors were on-call and worked as needed, “Therrien’s position involved full-time employment at a set, regular salary.” The court also found Therrien didn’t have any decision-making power and Gagnon was in control of most aspects of his work.

“Gagnon had the control and direction of Therrien in respect to what work was to be done and when it would be done,” the court said. “(Therrien) relied on Gagnon’s job offer to be his sole source of income, and Gagnon had the same expectation. The relationship between the parties was one of employment.”

Gagnon’s statement to Therrien that his future work would only be part time was a substantial change to the essential aspects of his job such as the nature of his employment and his pay. Therrien was awarded 12 months’ salary in lieu of notice for constructive dismissal.

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