Ontario Court of Appeal Revisits the Employee vs. Independent Contractor Distinction

In McKee v. Reid’s Heritage Homes Ltd., the Ontario Court of Appeal confirmed that there is an intermediate category between the categories of employee and independent contractor, and altered the traditional analysis used to determine into which class an individual falls.

Elizabeth McKee was a salesperson for Reid’s Heritage Homes. She received money from Reid’s for each home she sold, from which she in turn paid her own employees. When Reid’s offered McKee a new, six-month contract after nearly 20 years, she rejected the offer and brought an action for wrongful dismissal.

Applying the well-established Sagaz test, the trial judge found that McKee was obliged to sell exclusively for Reid’s, and was an integral part of their business. On this basis, the judge concluded that McKee was an employee of Reid’s and awarded her 18 months’ pay in lieu of notice of termination. Reid’s appealed, claiming that McKee was really a dependent contractor.

The Ontario Court of Appeal dismissed the company’s appeal, finding that McKee was an employee, regardless of the fact that she ran her own business and employed her own employees. In addition to broadening the definition of employee to potentially include individuals who have their own businesses, the Court’s decision is significant for employers in two other respects.

First, the Court confirmed that there is an intermediate category between the employee and independent contractor classifications: the dependent contractor. The dependent contractor is defined by the exclusivity and economic dependency of the working relationship. The Court further confirmed that a dependent contractor relationship will give rise to reasonable notice of termination; however, the precise amount to which a dependent contractor will be entitled was not addressed in McKee, as the Court had already concluded that the plaintiff was an employee.

Second, the Court of Appeal modified the test that has traditionally been applied to distinguish between employees, dependent contractors, and independent contractors. Instead of immediately considering all three categories into which an individual may fall, the Court stated that the correct approach is comprised of two steps. The first is a consideration of whether the worker is an employee or a contractor. Only if the court concludes that the individual is a contractor will the court go on to determine whether the person is a dependent or independent contractor. In other words, plaintiffs have two “kicks at the can” to demonstrate that they are entitled to notice of termination: they may either prove that they are employees or, at the second stage of the analysis, prove that they are dependent rather than independent contractors.

What Does this Decision Mean for Employers?

Businesses must be wary when attempting to create an independent contractor relationship. Even if an individual operates through his or her own company, if the company only has one client, and is bound to this client by an exclusivity or non-competition clause, the individuals may be considered dependent contractors or even employees of the company. In either case, the individual is entitled to reasonable notice of termination or compensation in lieu thereof.