Dismissing a contractor

Is this a simpler or less risky process than dismissing an employee?

Dismissing a contractor

As most employers know, dismissing an employee can be a costly endeavour that can expose the company to liability. Establishing just cause for dismissal is a high bar for an employer to meet, and dismissal without cause usually entitles the employee to reasonable notice under common law (unless an enforceable employment contract limits the employee’s entitlements).

But what about dismissing a contractor? Is this a simpler or less risky process than dismissing an employee? In many ways, the answer is no, as contractors are also provided with some legal protections, depending on the nature of the relationship.

Independent vs. dependent contractors

While we used to think of a dichotomy between employee and independent contractor, the courts have recognized an intermediary category of “dependent contractors”, which, like employees, are entitled to reasonable notice of termination. As the court explained in Keenan v. Canac Kitchens:

“Employment relationships exist on a continuum; with the employer/employee relationship, at one end of the continuum, and independent contractors at the other end. Between those two points, lies a third intermediate category of relationship, now termed dependant contractors.”

While a variety of factors can be considered in determining if a contractor is dependent or independent, a finding that the worker was economically dependent on the company due to either complete exclusivity or a high level of exclusivity weighs heavily in favour of the conclusion that the worker was a dependent contractor.

If a worker is found to be a dependent contractor, they will be entitled to reasonable notice of termination, which could be significantly more than the notice set out in their contract.

Material breach of contract

Unlike in an employment relationship, the standard of “just cause for dismissal” does not apply in the context of a contractor. However, a company may terminate a contract if the contractor has materially breached the contract. A material breach occurs when the breach of the contract is so substantial that it defeats the purpose of the contract and further performance is impossible.

In the case of Shelanu Inc. v. Print Three Franchising Corp, the Ontario Court of Appeal adopted five factors to apply when considering whether there has been a substantial failure of performance amounting to a material breach:

  1. the ratio of the party’s obligation not performed to the obligation as a whole
  2. the seriousness of the breach to the innocent party
  3. the likelihood of repetition of such breach
  4. the seriousness of the consequences of the breach
  5. the relationship of the part of the obligation performed to the whole obligation.

Pursuant to common law, a party may immediately terminate a contract where there has been a material breach by the other party, even when the contract specifies a notice period for early termination.

In the case of Shekhdar v. K&M Engineering and Consulting Corp., the court considered an independent contractor’s claims for wrongful dismissal. In that case, the company argued that the contractor had fundamentally breached the contract, which allowed it to terminate the contract without notice. Absent a material breach, the contractor was entitled to 15 days of notice for early termination of the contract.

The court found that while the contractor used poor judgment and engaged in highly inappropriate language, his behaviour did not constitute a fundamental breach of the contract, and the company was not justified in terminating the contract without notice. The court found:

“Mr. Shekhdar was never given a formal warning about this behaviour which was ongoing for several months and told that if this behaviour continued, it would result in the termination of his Agreement [...] and I find his behaviour was not so egregious as to constitute a breach of the fundamental terms of the Agreement.”

Accordingly, even in the context of independent contractors, companies should be aware that not all misconduct constitutes a fundamental breach of contract that would entitle the company to terminate the contract without notice.

Contractors vs. employees

Finally, it is important to consider that some workers who are classified and paid as contractors may in fact be considered to be employees by the courts. Further discussion about this issue can be found here.

If the courts find that an individual is actually an employee, they will be entitled to all of the legal protections and entitlements afforded to employees under the Employment Standards Act, 2000 and the common law.

Conclusion

When faced with a decision to dismiss a contractor, companies should not assume that the process will be straightforward or without peril simply because the contractor is not classified as an employee. We recommend speaking with an employment lawyer to ensure that the dismissal is handled in a way that minimizes the company’s potential liability. Otherwise, the company may be faced with a costly and time-consuming lawsuit that could have been avoided.

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