"Fundamentally, the question has to be 'Why are you engaging an independent contractor?'"says lawyer
A contract that identifies a worker as an independent contractor is no guarantee that they actually are one, according to Michael Horvat, a partner in the Workplace Law Group at Aird and Berlis in Toronto.
“Simply putting in a couple of items saying that someone is an independent contractor will not sway an adjudicator if [the contract] is challenged and all the other operative elements are indicative of an employment relationship,” says Horvat.
An Ontario company found itself with that problem after the Ontario Relations Board determined that a worker who had signed as an independent contractor was actually an employee.
The worker had a background in real estate, but in 2018 he was hired by Real Crowd Capital (RCC), a company that obtained financing for clients for development projects in Toronto, to perform underwriting work.
Usually, RCC’s owner would find a developer needing financing and the worker would prepare an agreement and find a lender.
Independent contractor agreement
The worker signed an independent contractor’s agreement on June 4, 2018. The contract stated that the worker’s corporation would provide services as an independent contractor and not an employee. The worker was expected to set his own hours and use his own equipment.
The contract also indicated that the worker was responsible for indemnifying RCC against unpaid statutory deductions if the Canada Revenue Agency found that he was an employee. The worker was free to work for other businesses as long as there was no conflict of interest, but he had to immediately advise RCC if he took on another job.
A termination clause allowed the contract to be terminated at any time for any reason with 15 days’ notice with written notice or pay in lieu of notice. RCC could terminate for just cause in the event of poor performance and misconduct. If the worker was found to be an employee, then the statutory minimums would apply.
The saving clauses about what would happen if the worker was found to be an employee were problematic, according to Horvat.
“You can't say, ‘If this is an employment contract, we want the following to apply, but we don't want it to apply because we think it's an independent contractor arrangement,’” he says. “You basically have to say, ‘This is our arrangement and if it gets challenged, you lose everything.’”
“But the more you put into the contract that limits [the worker], then the more risk it is that it's going to be determined to be an employment relationship – if it walks like a duck and quacks like a duck, it's a duck,” adds Horvat.
Company determined amount of commission
The contract also set out the worker’s compensation as between 10 and 25 per cent of the debt fee from a client, but this could be split with other employees involved as determined by RCC.
The worker was required to attend all company staff meetings “within reason.” He had a home office, but he frequently worked at the RCC office.
There were some discussions before the worker signed the contract, which resulted in the non-solicitation period being reduced and some other small changes.
RCC provided a a computer for the worker to take home. According to the worker, most days he was in the RCC offices and regularly received feedback from the owner. He had business cards identifying him as an RCC associate and the owner decided which deals he would work on.
RCC hired an employee in September 2018 whose main role was to help the worker on the front end of deals.
Courts and the Canada Revenue Agency will look at the factual reality of the relationship regardless of what the contract says.
Worker questioned pay
By late 2018, the worker started complaining because he had received a small amount of pay – he believed he was entitled to 25 per cent commissions - and he had performed unpaid work unrelated to any deal.
RCC proposed capping his commissions to allow for more commission sharing, but the worker felt that this was a change in his contract. He also said that he believed that he had been an employee from the start and if RCC terminated the contract he would be owed statutory minimums.
In early 2019, RCC advised the worker that he would work for Capstack, another company under the same owner, and provided a new contract. The worker refused to sign, citing his outstanding commissions. However, he continued to work under the terms of the RCC contract.
In July and August, the worker sent commission invoices. but the owner said that he wouldn’t be paid until his new contract was signed.
A true independent contractor is not covered by employment standards legislation protections, says an employment lawyer.
Access disabled
On July 16, the worker said that RCC couldn’t withhold money that he was owed. The same day, RCC disabled his access to company software and asked for its computer back, saying that it didn’t want him working on anything without a signed contract.
Three days later, RCC provided a final contract and said if the worker didn’t sign it, they would pay commissions subject to him signing a release. The worker refused and suggested that he could file claims and customers might become aware that RCC had withheld money from him.
On July 23, RCC informed the worker that his relationship with the company was terminated. The termination letter suggested that the worker had threatened to defame RCC to clients and he was breaching the contract’s confidentiality obligations by failing to return the company computer.
The worker made an employment standards application for commissions for two major projects plus minimum wage for each week in which he didn’t earn commissions. An employment standards officer determined that the worker was an independent contractor and declined to issue an order to pay. The worker appealed to the board.
When it comes to disputes over the employment status of a worker, the problem is rarely with the contract itself, says Horvat.
“The issue is always what are the actual facts with regard to how the parties have structured their relationship on a day-to-day operative basis,” he says. “And I think the concern that the Labour Board had was that they practically couldn't distinguish between a commissioned salesperson and an independent contractor that worked on a commission.”
The Canada Revenue Agency and employment standards boards may rule differently on whether a worker is an employee or is self-employed, according to an employment lawyer.
Restrictions on worker
The board’s employment standards appeal body found that the original contract purported to give the worker free rein, but there were several restrictions. It also noted that RCC unilaterally terminated his contract and transferred him to Capstack after the worker advised that he believed that he was an employee.
The board found that the worker was “subjected to fairly substantial control.” He was paid by commission only and RCC had discretion over how much it would be – which wasn’t a normal contractual relationship, said the board.
The board also found that RCC put limits on when the worker could work on his own time, as he was expected to attend meetings at RCC’s offices. Typically, RCC’s owner would contact the worker and instruct him on what to do that day.
The worker was also not able to freely communicate with clients and, although he used his own cellphone, he used a company computer that RCC demanded back when it terminated the contract, the board noted.
An employer that wants to transfer an employee to be an independent contractor must formally sever the employment relationship, says an employment lawyer.
Employment relationship
Other factors pointing to an employment relationship included the fact that RCC hired an employee to help the worker, he had little financial risk in the business, his opportunity for profit rested entirely in the commissions he earned, and he was portrayed to clients and the public as part of the company, said the board.
“Given the nature of the product that was being sold and the nature of the business, it was always going to be an uphill climb because the fundamental problem was, how do you distinguish this independent contractor from a commission salesperson?” says Horvat.
The board determined that the worker was an employee and not an independent contractor. RCC was ordered to pay the worker commissions on two projects for which the worker had claimed plus minimum wage for work performed unrelated to the projects. With vacation pay included, the total award was $108,749.67.
“Fundamentally, the question has to be, why are you engaging an independent contractor?” says Horvat. “Typically, the answer is, because we don't want to pay overtime and we don't want to pay severance when the person is let go - that's not the best reason.”
“You can engage an independent contractor because of a specific need for a specific skill set for a defined period of time.”
See Brian Graff v. Real Crowd Capital Inc., 2023 CanLII 12654.
