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Employee Classification Risks

The way people view and perform work is changing and Canadians must be ready to respond. Short-term engagements, temporary contracts and independent contracting characterize this type of workforce. Organizations often rely on contractors to fill key positions, help maintain labour flexibility and keep overhead costs under control. However, any organization that uses independent contractors or is considering doing so, need to be aware of the associated risks and seek the advice of experienced legal counsel.

This article sets out to use a recent Uber class action, Uber v Heller, as a precedent to exemplify the legal and financial risks associated with how companies classify workers. We will look at how the courts make decisions on classification of workers, what protection is available to independent contract workers; and finally suggest some ways businesses can build practices to protect themselves.

Workers need to understand how they are classified, what it means; and take action when there is an issue. Employers need to understand how to create and maintain proper practices to accurately assess and classify their workforce.

Let’s look at Uber v Heller more closely.

In the Uber Class Action, the plaintiffs seek $400 million in damages as well as a declaration that Uber drivers are employees (not contractors) of Uber and therefore entitled to the benefits and protections afforded by the Employment Standards Act (ESA).

Uber brought a preliminary challenge to the proposed class action on the basis that its drivers, including Mr. Heller, were precluded from proceeding through the courts as they had instead agreed to resolve any disputes through private arbitration in the Netherlands. In the end, the action was stayed in favour of arbitration. For a more detailed review of this decision see my earlier article Arbitration Clause in Employment Contract puts the Breaks on the Uber Class Action in Ontario

Mr. Heller appealed the stay decision to the Court of Appeal claiming that the arbitration clause in Uber’s driver services agreement represents an unlawful contracting out of the ESA and that the clause is unconscionable and thus invalid at law. The Court of Appeal accepted both arguments and overturned the decision of the motion judge. I also wrote about this Court of Appeal decision: Uber Class Action Given the Green Light to Proceed by Ontario Court of Appeal

So, are Uber Drivers now classified as Employees?

The Ontario courts have yet to answer the question of classification — whether Uber drivers are classified as employees. The ruling on the classification is the larger issue in the Uber case litigation. However, at this time, the court is still determining the preliminary issues of jurisdiction and the enforceability of the arbitration clause. The Supreme Court of Canada – the highest court in our country – has granted to hear Uber’s appeal.

This case clearly demonstrates the significant impact of improper classification claims on a large company. Regardless of the outcome of the Uber case in terms of classification, the case demonstrates that clarity and enforceability of the classification system used by an employer is very instrumental in protecting employers against costly litigation such as what Uber is currently involved in.

Employers must become proactive in taking action to sharply review and assess workforce compositions and ensure that appropriate classifications are in place. Employers must also understand that a worker’s title does not determine whether they are an employee or independent contractor but that it is the nature of their employment relationship that determines the classification. As well, a worker’s actual classification may differ from what the contract specifies.

How do the courts determine worker classification?

In Sagaz Industries Canada Inc., the Supreme Court of Canada outlined some of the factors to consider in determining whether a worker is an employee or an independent contractor. In the decision, the Supreme Court of Canada makes the point that there is no single test that provides a clear answer to ever-changing variables of workforce relations (hence classification of employee versus independent contractor) and that people must examine all possible factors in the relationships to form a picture of the total relationship of the parties.

Canadian courts and tribunals have developed common law tests associated with the employment relationship to determine who is an employee and who is an independent contractor. The following are key factors considered in these tests:

  • Control
  • Ownership of tools
  • Chance of profit/risk of loss
  • Business integration
  • Payment
  • The factors are weighed and considered together in determining whether a person is an employee or independent contractor.

As an example, if the relationship looks like an employment relationship wherein the employer controls working conditions and the worker is economically dependent on the employer, the worker will likely be found to be an employee.

Worker Classification Example:

The case Fisher v Hirtz, 2016 ONSC 4768 details the scope of review and analysis necessary in determining the true legal nature of employment relationships and employee classifications therein and the impact of that classification on dismissal claims.

In this case, the plaintiff sues a company for wrongful dismissal. In the end, her claim was dismissed because the court determined she should be classified as an independent contractor not an employee. Had she been deemed an employee or dependent contractor, the court would have concluded, among other things, that she did not quit but was dismissed without cause and was entitled to pay in lieu of reasonable notice.

Employee versus contractor cases result in varying decisions on classification — there is no set formula to determine classifications. Decisions must be on a case-by-case basis involving close attention to the factors in each case. In the end, the true legal nature of the employment relationship must be identified and clarified.

In determining the true legal nature of relationships the courts look at:

  • The intentions of the parties
  • How the parties themselves regard the relationships
  • The behaviour of the parties toward each other
  • The manner of conducting their business with one another.

In Fisher v Hirtz, the court followed the tiered analysis and applied the above legal principles of established methodologies and criteria. In the end, the worker was deemed a contractor as her employer assigned the work, as it did to other trades persons, but she controlled whether she would accept the assignment.

The first stage of analysis will end once the worker is determined to be an employee. If the worker is determined to be a “contractor” the analysis will continue through a second stage to decide if they are a dependent contractor or an independent contractor.

In the case cited above, during the second stage of the analysis, the court determined she was an independent contractor as she had only provided varying amounts of services over a sixteen-month period during which she also carried on business as a sole proprietor. There was little evidence of any long-term dependency.

General Overview of Independent Contractors

Essentially, contractors are self-employed service providers who manage their own businesses.

An independent contractor has more freedom to choose how they complete work but are responsible for paying their own taxes, getting their own health insurance, and paying into unemployment and workers compensation funds. The most important factor is the level of control an employer has over the worker.

In contrast, an employee works under the control of an employer and has certain benefits provided by the employer including workers compensation, unemployment insurance, and health insurance.

Protection for Contract Employees

Canadian law has not yet caught up with changes in the labour market and contract workers are generally excluded from the protections and benefits that accompany traditional paid employment.

Gig workers are generally treated as independent contractors with none of the employment rights guarantees available in more regular jobs. The Employment Standards Act (ESA) does not apply to independent contractors, volunteers or other individuals who are not considered employees under the ESA.

How can businesses and employers protect themselves?

Practice development tips:

  • Take a proactive approach to reviewing the workforce and classifying employees accordingly. This can save a lot of headaches, potential penalties and even mitigate the risk of litigation.
  • Make sure employees are not misclassified as contractors when they should be recognized as regular staff with rights under the Employment Standards Act — contact an experienced employment lawyer for advice if necessary.
  • Regularly monitor the relationship to ensure the contractor’s independent status doesn’t change. For example, a company might hire an independent contractor who becomes more engaged in the company over years. If the company’s reliance on the individual’s services grows, the individual could be deemed an employee.

Workforce Tips:

  • If there are independent contractors who are actually being treated like employees, it may be time to change their classification.
  • At time of hiring, if a worker insists that they want to be an independent contractor and not an employee, it is advisable to investigate the situation and seek legal advice before agreeing.
  • In the event of a challenge, the practical reality will govern the classification and not what is written in a contract.

Contact Justin W. Anisman

Contact Justin W. Anisman, the author of this blog, about any employment law related questions or issues you may be facing. Call 416-304-7005 or email him at janisman@btlegal.ca.

Justin W. Anisman is an Employment Lawyer at the Toronto law firm Brauti Thorning LLP. Justin advises both companies and individuals in all aspects of employment law including wrongful dismissal, human rights and discrimination.


The publications made on this website are provided and intended for general introductory information purposes only. They do not constitute legal or other professional advice, or an opinion of any kind. Speak to a professional before making decisions about your own particular circumstances.

Employee, Independent Contractor or something in between?

As an employment law lawyer, one of the most common issues I face is confusion from clients over whether they are (or a particular worker is) an “employee,” or “independent contractor.” It is important to understand how workers are classified, and what that means for them in terms of rate of pay, benefits, and legal protections upon termination. Employers must be diligent in properly classifying their workers, as failure to do so can result in serious penalties and tax consequences.

Employees vs Independent Contractors

Strict definitions for the terms “employee,” “independent contractor,” and “dependent contractor” have not been very useful, so courts have relied upon various common law tests for determining the differences between them. Despite these tests, it is not always easy to determine the proper classification of any individual worker.

Employees

A worker may be an employee under the law even if they have agreed in writing to be classified as an independent contractor, submit invoices, or use their own vehicle while completing work tasks.

If having a contract or submitting invoices doesn’t make someone an independent contractor, what does?

In determining whether a worker is an employee, there is not one single overriding factor. Each worker’s situation will be viewed independently, and several different factors will be weighed. With that being said, a worker may be an employee if some of the following factors describe their work situation:

  • The employer provides all the tools and equipment needed to perform work duties;
  • Pay does not fluctuate according to how quickly or how well work is done. For example, the worker is not paid more if a task is finished by Wednesday, instead of Friday;
  • The employer can discipline or suspend;
  • The worker does not determine what job tasks need to be completed;
  • The worker does not set his own rate of pay for his services;
  • The employer determines the location where work is performed; or
  • The employer determines when tasks need to be completed by.

If a worker is an employee under the law, then she is entitled to all the employment rights and protections found in the Employment Standards Act. These rights and protections include:

  • Minimum wage;
  • Overtime pay;
  • Vacation pay;
  • Protected leave; and
  • Notice, or termination pay in-lieu-of notice.

Independent Contractors

Factors that the Court considers in deciding on the issue are similar, but opposite, to those considerations for employees, and include:

  • The worker owns or provides the tools and equipment needed to perform work duties;
  • The worker is in business for him/her self. This means the worker has the ability to make a profit (if the work is done quickly, efficiently, or inexpensively, for example) but also that their is a risk that he looses money (if, for example, the worker under estimated his costs, or circumstances arise that make the work more expensive than anticipated);
  • The worker may be paid more or less money depending on when the job tasks are completed;
  • The worker can subcontract the job tasks;
  • The employer cannot discipline the worker but he could cancel the contract;
  • The worker can work for multiple organizations at the same time; and
  • The worker exercises some control in where or when work is done and who performs that work.

An independent contractor will not have any of the rights outlined above for employees, unless such rights have been negotiated in a valid Independent Contractor Agreement.

What does the case law say?

In Belton et al. v. Liberty Insurance Company of Canada, the Ontario Court of Appeal heard a case where the classification of insurance agents as employees or independent contractors was the central issue. Mr. Belton, and similar workers, were commissioned sales agents, selling insurance for Liberty Insurance. Each agent had signed a written employment agreement with Liberty Insurance in which they acknowledged they were independent contractors. Liberty Insurance eventually presented the agents with new contracts, which reduced their commission rates and added minimum production levels. The agents refused to sign the new contracts, and Liberty Insurance terminated their employment. The agents sued their employer for wrongful termination. The trial judge concluded that the agents were employees under the law, not independent contractors.

In reviewing this case on appeal, the Ontario Court of Appeal noted that a written agreement stating workers will be classified as independent contractors is not determinative of the proper classification under the law. The Court also outlined the specific factors the trial judge had identified as factors she had weighed in reaching her conclusion:

  1. Whether or not the agent was limited exclusively to the service of the principal;
  2. Whether or not the agent is subject to the control of the principal, not only as to the product sold, but also as to when, where and how it is sold;
  3. Whether or not the agent has an investment or interest in what are characterized as the “tools” relating to his service;
  4. Whether or not the agent has undertaken any risk in the business sense or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission;
  5. Whether or not the activity of the agent is part of the business organization of the principal for which he works. In other words, whose business is it?

The Court of Appeal acknowledged, as the Trial Court had, that there was no direct contact allowed between the agents and their customers regarding policy changes or renewals, all of the agents had Liberty Insurance managers, the agents were not permitted to advertise using Liberty Insurance’s name, and the agents did not have any ownership rights to their customers. Therefore, that the agents were employees of Liberty Insurance, not independent contractors.

Dependent Contractors

The courts have more recently recognized a middle ground between employee and independent contractor by the classification of some workers as “dependent contractors.”

It is important to note that the courts are not creating an entirely new third category of workers with this distinction. Instead, dependent contractors are considered a subset of “contractors,” who merit different treatment upon termination than independent contractors do.

In McKee v. Reid’s Heritage Homes Ltd., the Court of Appeal heard a case which illustrates this distinction. Heritage Homes, owned by Reid, entered into a written independent contractor agreement with Nu Home Consultant Services, which was operated by its owner McKee. McKee was to advertise and sell 69 homes for Reid, for a fee of $2,500 per home sold. Reid was to have sole use of McKee’s services until the relationship ended. The 69 homes were quickly sold, and the contractual relationship continued. The relationship even continued after Reid’s death, at which time his son-in-law, Blevins, succeeded him.

Blevins eventually decided that McKee and her sub-agents should have to work as direct employees. McKee requested the new employment agreement be put in writing, but the parties were never able to reach mutually agreeable terms. The employment relationship subsequently ended, and McKee sued for wrongful termination. After examining the relevant factors, the trial court found McKee to be an employee, and awarded her eighteen months of termination pay in lieu of notice.

In reviewing this case, the Court of Appeal looked at the classifications of employees, independent contractors and dependant contractors:

I conclude that an intermediate category exists, which consists, at least, of those non-employment work relationships that exhibit a certain minimum economic dependency, which may be demonstrated by complete or near-complete exclusivity. Workers in this category are known as “dependent contractors” and they are owed reasonable notice upon termination.

The Court of Appeal went on to explain that the first step “is to determine whether a worker is a contractor or an employee.” If the first step determines the worker to be a contractor, then step two “determines whether the contractor is independent or dependent, for which a worker’s exclusivity is determinative, as it demonstrates economic independence.”

The courts have made it clear that dependent contractors are entitled to reasonable notice, or termination pay in lieu of notice. The length of notice can be specified in an employment agreement. If there is not a valid employment agreement speaking to this issue, then the length of appropriate notice will vary on a case by case basis, determined by the weighing of several factors.

Final Thoughts

It can often be difficult to determine how a worker should be classified. There are great differences in these classifications, and those differences can have a huge impact on both employees and employers.

The fact is that that vase majority of workers classified by their employers as independent contractors are not. If you are a worker, you are probably not an independent contractor. If you are an employer, that person coming into your workplace everyday is probably an employee. Regardless of what your contract may say, a Court may decide that the worker is entitled to all the protections in the Employment Standards Act.

For employees, if you have concerns that you have been improperly classified, speak to a knowledgeable Ontario employment lawyer as soon as possible. The lawyer can go over the specific details of your employment situation and give you advice on which classification is the most appropriate for you. With this information, you will know what rights are due to you while still employed, and also at the end of the employment relationship.

For employers, I also recommend speaking to an employment lawyer if you have concerns about the proper classification of your workers. Failure to properly classify workers can result in serious penalties. You may be stuck with large severance payments because your improper classifications caused you to fail to meet the notice requirements. If workers are properly classified, these are issues that can be specified to in a written employment contract. This limits your overall exposure. A lawyer well-versed in such employment issues can help you make the best decisions for your business.


Contact Justin W. Anisman

Contact Justin W. Anisman, the author of this blog, about any employment law related questions or issues you may be facing. Call 416-304-7005 or email him at janisman@btlegal.ca.

Justin W. Anisman is an Employment Lawyer at the Toronto law firm Brauti Thorning LLP. Justin advises both companies and individuals in all aspects of employment law including wrongful dismissal, human rights and discrimination.


The publications made on this website are provided and intended for general introductory information purposes only. They do not constitute legal or other professional advice, or an opinion of any kind. Speak to a professional before making decisions about your own particular circumstances.