Beware the Dependent Contractor: Court Awards 26 Months’ Notice

In the case of Keenan v. Canac Kitchens, the Ontario Superior Court of Justice reminds employers of the factors to be considered in discerning whether an independent contractor agreement or relationship is actually not an employee relationship… or something else.

Lawrence Keenan worked for Canac from 1976 to 2009. Mr. Keenan’s wife worked for Canac from 1983 to 2009, prior to which time she helped her husband on an informal basis to install kitchen cabinets and subsequently to supervise the installation, delivery and repair of kitchen cabinets. In 1987 Canac informed the Keenans that they would no longer be employees and would instead carry on their work for Canac as independent contractors. They were informed that going-forward, Canac would set the rates to pay the installers but the Keenans would be responsible for paying installers who would provide their own trucks.

The Keenans signed an agreement with Canac stipulating this new structure without seeking legal advice. Canac issued a Record of Employment indicating the reason for issuance as “quit” and the Keenans registered a business name and obtained insurance as required by the agreement. They also registered with the former Workplace Compensation Board but not with the Canada Revenue Agency. The Keenans worked exclusively for Canac until 2007 and were under the impression that the agreement prohibited them from working for other employers. In 2008, 66% of their work was from Canac and in 2009 that number increased to 73%. Furthermore, they enjoyed Canac employee discounts, wore the company logo and appeared to third parties to be Canac representatives.

In 2009, Canac informed the Keenans that it was closing its doors. It also informed them that they were not required to provide any notice of termination. At issue in this case is whether the plaintiffs were dependent contractors or independent contractors of Canac.

The Court began by restating the law of dependent contracts in Ontario defining it as an “intermediate category of relationship” between employee and independent contractor. It reiterated that dependant contractors are owed reasonable notice on termination and then provided the test which employers should apply to distinguish independent contractors from employees, when considering the status of a commissioned agent:

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 ownership of the tools.

4. Whether or not the agent has undertaken any risks 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?

When applying this test to the facts presented above, the Court concluded that the Keenans were dependent contractors from 1987 until their termination, having been employees of the defendant prior to that. The Court concluded:

• The terms of the 1987 agreement could reasonably be interpreted as requiring exclusivity and Mr. Keenan believed that they were not at liberty to work for other kitchen cabinet companies.

• Canac maintained effective control of the business by setting the rates for both the installers and the Keenans, establishing the service standards, dictating work flow, setting deadlines, providing a lawyer to advocate at a workers’ compensation hearing for an outcome favouring Canac’s interests.

• While the Keenans supplied their own manual tools, Canac supplied a pager, car phone, and mobile phone and office space at Canac’s business premises.

• Due to the piecework arrangement for payment and the fact that the plaintiffs were as fully engaged as they could be in working for Canac, there was no genuine opportunity to generate additional profits.

• Finally, it was Canac’s business given the representation made to third parties by the requirement to display Canac’s logo on vehicles used to transport Canac’s product to the job site.

The Court recognized Mr. and Ms. Keenan, respectively, 32 and 25 years of service and awarded 26 months’ wages in lieu of reasonable notice of termination.

Employers should be cautious when attempting to create an independent contractor relationship as courts will go beyond the written agreement to determine whether the contractor is a true business and is independent from the employer. The more control that employer has over the work process, hours of work and rate of pay, the greater the likelihood that the contractor will be deemed an employee or a dependent contractor.