Category: Independent Contractor vs. Employee

Correctly classifying a worker as an employee or an independent contractor can dramatically impact the employer’s responsibilities and the worker’s rights and entitlements, particularly in the event of a termination. Further, employers must consider the consequences of using fixed-term contracts with an employee or an independent contractor, as they may lead to substantial cost consequences. 

These issues were recently addressed in a decision from the Ontario Court of Appeal, which clarified the law regarding independent contractors and their mitigation obligations following the termination of their services under a fixed-term contract.

Trial judge awards contractor full payment under contract

In Monterosso v. Metro Freightliner Hamilton Inc., the defendants (appellants) hired the plaintiff (respondent) as an independent contractor. The parties signed a 72-month term contract on March 7, 2017. The plaintiff’s services were terminated by the appellants, without cause, on November 22, 2017. As a result, the plaintiff commenced a claim against the respondent, seeking to recover payment for the remaining 65 months under the contract. 

The trial judge found that the contract did not contain a termination provision and unambiguously provided for a fixed term of 72 months. Based on the remaining monthly payments owed under the contract, the trial judge awarded the plaintiff $552,500 plus HST.

Contract between parties contained an “entire agreement clause”

The appellants appealed the decision and argued that the trial judge erred by failing to consider and address email correspondence dated March 1, 2017. They claimed that this communication showed that an additional provision was added to the contract to ensure the respondent would be paid until the last day of active service. They also argued that the respondent saw the email correspondence, and it would therefore be inequitable to allow him to rely on payment for the full 72-month term. 

The Court of Appeal rejected these arguments, finding that the email correspondence relied on by the appellants was ambiguous compared to the unambiguous language within the contract. The Court highlighted that the contract also contained an “entire agreement clause,” designed to avoid reliance on discussions that are not explicitly included in the contract. The Court also noted that the trial judge found no evidence of undue influence, mistake, waiver, fraud, or misrepresentation, and therefore, this matter did not require rectification. 

The Court also found no reason to interfere with the trial judge’s decision based on the additional arguments put forward by the appellants. The appellants failed to call the human resource manager, who prepared the contract, as a witness at trial and as such, the trial judge was entitled to draw an adverse inference against them. 

Appellants argue that the respondent failed to mitigate damages

The appellants also based their appeal on the claim that the trial judge erred in finding that the respondent was not required to mitigate his damages. The Court accepted this argument after finding that the trial judge conflated the duties and obligations of independent contractors with those of employees working under fixed-term contracts. 

The Court referred to its previous decision in Howard v. Benson Group Inc., which held that “employees under fixed-term contracts are entitled to damages equal to the loss of remuneration for the balance of the fixed term, without a duty to mitigate, this court has never held that independent contractors do not have a duty to mitigate following breach of a fixed-term contract.” The Court also referenced the decision in Mohamed v. Information Systems Architects Inc., which held that “no duty to mitigate in the specific circumstances of that case because the parties intended compensation for the fixed term to be the consequence for failing to terminate the contract in good faith.”

When does a duty to mitigate arise?

The Court used this case to provide clarity on the issue and held that independent contractors providing services under fixed-term contracts do, in fact, have a duty to mitigate their damages in the event of a contract breach unless the contract terms provide otherwise. 

The Court explained that a duty to mitigate arises due to a contract breach, which includes contracts with independent contractors subject to the specific terms of the contract. In this case, the respondent was not in an “exclusive, employee-like relationship with the appellants.” Further, he was not dependent on the appellants as he was permitted to provide services for other parties. Ultimately, the Court found that there was no basis for the trial judge to find that the respondent was not required to mitigate his damages. 

Appellants fail to meet burden of proof; appeal dismissed

Although the trial did not make any findings on the issue of mitigation, the Court indicated that the appellants failed to satisfy their burden of establishing that the respondent failed to mitigate damages. On the other hand, the respondent provided “extensive evidence” illustrating his unsuccessful job search efforts. 

While the appellants acknowledged the respondent’s evidence, they claimed that he was searching for jobs beyond his experience and qualifications. However, the Court disagreed. Despite the trial judge’s failure to find that the respondent was required to mitigate damages, the appellants did not meet their burden of proof to prove that the respondent failed to mitigate.

The Court dismissed the appeal and awarded costs to the respondent. 

Contact Haynes Law Firm in Toronto for Advice on Employee Classification and Fixed-Term Contracts

At Haynes Law Firm, our trusted employment law team, led by Paulette Haynes, regularly advises both employers and employees on their rights and obligations with respect to various employment law concerns, including wrongful termination claims, fixed-term employment contracts, employment classification issues, and more. We help employers draft contractual agreements that accurately reflect the circumstances and needs of the parties in an effort to avoid future disputes. We also help employees understand their rights in the event of a termination in order to ensure that they recover the compensation that they are entitled to. To schedule a confidential consultation with our firm, contact us online or by phone at 416.593.2731.

Gig workers enter agreements with companies to provide services to their clients. They often use digital platforms to book jobs, such as delivering food or transporting people. This type of income-earning activity falls outside the scope of a traditional employment relationship and various jurisdictions have struggled to determine how to regulate such relationships.

However, it is clear that gig workers are increasingly being afforded rights, and companies that use their services must take care regarding their classification. This article looks at some of the advantages of using independent contractors and the development of the law in regulating gig workers’ rights, culminating in Ontario’s Digital Platform Workers’ Rights Act 2022. 

Advantages of using independent contractors 

There are potential advantages to using independent contractors rather than employees. Companies do not need to comply with the employment standards in the Employment Standards Act (ESA) with respect to independent contractors. These include the requirements to pay minimum wage, provide time off, including vacation pay and make statutory deductions, such as contributions to the Canada Pension Plan and Employment Insurance.

Using independent contractors can provide greater flexibility for the business. It can be easier to terminate independent contractors, depending on the particular terms of the arrangement. Independent contractors are not entitled to statutory termination pay under the ESA or common law notice.

Could a “contractor” actually be an employee?

However, just because a contract labels a worker an “independent contractor” does not necessarily mean they are independent. They could be an employee. 

We recently wrote about how courts distinguish between employees and independent contractors. The key question is whether the worker is in business for themself (independent contractor) or simply providing services for another entity (employee). Courts look to a range of factors to determine this, such as whether the worker is subject to the entity’s control, provides their own equipment, and has the opportunity to profit rather than earn a regular wage.

If employers misclassify employees as independent contractors, they may be in for a shock. Firstly, they could be liable for back pay to ensure wages already earned meet the ESA requirements, for example, through payment of vacation pay. Misclassification is prohibited by the ESA and could result in a fine. There is the possibility of penalties from the Canada Revenue Agency, such as for failure to remit income tax. 

Finally, a misclassified employee could bring a wrongful dismissal claim, which could result to pay common law damages for reasonable notice or payment for the balance of the term if it is a fixed-term contract if the contract does not have an enforceable termination provision. 

The battle for more rights for gig workers 

The employment landscape has changed in recent times. More independent and flexible jobs have become common, aided by the internet and phone apps. This trend accelerated during the COVID-19 pandemic, with the closing of establishments and emphasis on home delivery.

Gig workers have been traditionally classified as independent contractors, exempting them from legislated employment standards like the payment of minimum wage. This has become a controversial political and legal issue in many jurisdictions. 

This battle has been playing out in Ontario. For example, a community union representing gig workers, Gig Workers United, has campaigned since 2018 for gig workers to be classified as employees under the ESA. This has been strongly resisted by some companies that use gig workers. Courts have also been called upon to determine whether workers have been misclassified. 

Ontario legislation passed to provide rights and protections for digital platform workers

In April 2022, the Digital Platform Workers’ Rights Act (Act) became law to enter into force on a day to be named by proclamation.

This Act provides certain rights and protections to workers who perform “digital platform work”, which is defined as the provision of payment rideshare, delivery, courier or other prescribed services by workers offered assignments through a digital platform.

The rights conferred by the Act include minimum wage for each work assignment (but not for time spent waiting for assignments), the right to receive tips and gratuities, and the right to receive certain information from the operator, such as a written explanation of the reasons for removing access to the platform.

Importantly, the Act does not make digital platform workers employees entitled to the ESA’s benefits. In fact, the Act states that it establishes rights for these workers regardless of whether they are employees. According to section 5, if the terms of an applicable contract or other legislation (like the ESA) provide a greater benefit than a right under the Act, that greater benefit applies.

Can gig workers be found to be employees?

As a result, the presence of this new legislation only settles once and for all the question of whether gig workers may be classified as employees. A class action has been brought claiming that Uber has misclassified over 350,000 workers in Ontario. 

Another mechanism through which a worker may argue they are an employee is by filing a claim with the Ontario Ministry of Labour. For example, in February 2022, an employment standards officer decided that a particular Uber Eats courier was an employee rather than an independent contractor. Uber has appealed this decision. 

Contact Haynes Law Firm in Toronto for Guidance on Proper Worker Classification

The Haynes Law Firm advises employers on the classification of workers. Paulette Haynes has an in-depth understanding of the law relating to worker classification and the recent statutory developments, so you can rest assured knowing that your organization is well-placed to achieve its staffing objectives. Whether it is designing contracts or policies or advising on termination, Haynes Law Firm can assist. We also advise and represent workers, ensuring they obtain their legal entitlements. If you have been misclassified, you can do something about it. Please get in touch with the Haynes Law Firm online or call us at 416.593.2731.

We recently wrote about the perils of misclassifying an employee as an independent contractor. If an employer treats a worker as an independent contractor when they are actually an employee, they could be on the hook for damages in a wrongful dismissal claim and/or fines under the Employment Standards Act (ESA) or imposed by the Canada Revenue Agency (CRA).

This article looks at the recent decision of the Ontario Superior Court of Justice in Baker v Fusion Nutrition Inc., which shows how things can unravel for employers that misclassify employees.

“Independent contractor” hired to generate sales for bodybuilding supplements wholesaler

In September 2020, the plaintiff started working with the defendant, Fusion Nutrition Inc., a wholesaler of bodybuilding supplements. 

In March 2021, the parties signed a fixed-term written contract for a period of one year, which stated that the plaintiff was hired as “an independent contractor and not as an agent or employee”. The agreement allowed the plaintiff to work for other companies, provided that the clients did not compete with the defendant and the work did not interfere with the plaintiff’s obligations to the defendant. The defendant did not withhold or pay tax, employment insurance or Canada Pension Plan contributions.

The plaintiff was paid $6,250 plus HST per month and a car allowance and expenses in exchange for generating sales revenue. However, in August 2021, the defendant locked him out of the office and did not communicate with him.

Plaintiff sued arguing that he was an employee

The plaintiff sued the defendant, claiming that despite the terms of the contract, he was an employee and not an independent contractor. He sought damages for breach of contract for the remainder of the one-year term. 

He also sought employee entitlements that had not been paid by the defendant. Specifically, he asked the court for back pay for unpaid vacation and holiday pay pursuant to the ESA.

Interestingly, the defendant did not appear in the proceedings. The plaintiff’s statement of claim was served on the defendant, and the plaintiff’s lawyer emailed the Chief Executive Officer. When no response was received, the plaintiff applied to ‘note the defendant in default’, allowing the plaintiff to then seek a judgment from the court in the absence of the defendant (called a default judgment).

Court found that the plaintiff was an employee, not an independent contractor

The plaintiff brought a motion for judgment, and Justice Ramsay examined the plaintiff’s written evidence to determine whether he had established his claims.

Firstly, her Honour looked at the plaintiff’s claim that he was an employee, and noted:

“Any agreement that purports to describe the nature of the relationship is not determinative … The absence of any statutory deductions, issued T4 slips … or, the fact that an individual uses their own vehicle for the purpose of carrying on business is also not determinative”.

Her Honour explained that it was necessary to look beyond the contract to determine whether an employment relationship existed. In seeking to determine whether the plaintiff was performing services in business on his own account (independent contractor) or for another (employee), her Honour looked at some of the factors we mentioned in our previous article.

The court agreed with the plaintiff that he was an employee of the defendant. Some factors supporting this conclusion included that he was paid regular wages (the same amount each month) and worked full-time from the defendant’s office. His work activities were controlled by the defendant. He did not hire helpers and could not contract out his work.

In addition, the income paid by the defendant was his primary source of income, and he had no opportunity for profit. Finally, given the contract’s restrictions on working for other clients, he was effectively restricted to working for the defendant.

Plaintiff was entitled to be paid out for the balance of the contract

The plaintiff’s contract contained a termination clause that allowed the employer to terminate without cause if it paid four months’ wages. It also allowed either party to terminate at any time for cause without notice.

As we have seen repeatedly, the court decided that the termination clause was unenforceable because the termination for cause provision did not comply with the ESA. The provision permitted the employer to terminate for a cause with no notice. In contrast, an employer can only avoid paying the statutory notice period if the employee engaged in “wilful misconduct, disobedience, or wilful neglect of duty that is not trivial and has not been condoned by the employer.”

If parties to a fixed-term contract do not specify a valid notice period, the employee is generally entitled to the wages they would have received until the end of the term of the contract. As a result, Justice Ramsay awarded the plaintiff $54,000 in damages for wages for the balance of the one-year contract term.

Court also ordered payment of vacation and holiday pay

The plaintiff, as an employee, was also entitled to annual vacation pay and holiday pay under the ESA. The court awarded damages in the amount of these entitlements, calculated from the time he was hired until the date of his termination. 

Contact Haynes Law Firm in Toronto for Advice on Proper Worker Classification

This case reminds employers of the potential consequences of misclassifying an employee and the harm associated with terminating a fixed-term contract that does not contain a valid termination provision. Ignoring a statement of claim and not participating in litigation also doesn’t help. 

Haynes Law Firm mitigates the risks for employers by properly drafting employment contracts and advocating for your position if it becomes necessary. Paulette Haynes also helps employees to obtain all of their entitlements, including if they have been misclassified. To discuss how the Haynes Law Firm can assist you, please contact us online or by phone at 416-593-2731.

The rights of employees under the law differ from those afforded to independent contractors; employers have greater responsibilities for employees.

If it looks like a duck, swims like a duck and quacks like a duck, it probably is a duck. Applied to the employment law context, even if a contract labels a worker an “independent contractor,” they may be an employee. 

This article looks at the differences between employees and independent contractors and how to determine which classification applies to a worker. We also look at why this matters. In Ontario, misclassifying an employee as an independent contractor brings a number of risks for employers.

Employee or independent contractor?

According to the Employment Standards Act (ESA), an employee is a person who performs work for, or supplies services to, an employer for wages; who receives training from an employer, provided that the skill being trained is used by the employer’s employees; or who is a homeworker, that is, works for compensation from their residence but is not an independent contractor. 

Employees have entitlements under the ESA, such as minimum wage, reasonable notice for termination without cause and vacation pay.

Independent contractors, on the other hand, are in business for themselves. They are not covered by the ESA and have more control over their work. For example, they determine when and where the work is performed and may be able to work for multiple clients at the same time. 

Unlike employees, independent contractors are responsible for paying income tax directly to the Canada Revenue Agency (CRA). There are other differences, too. For example, while employers make Canada Pension Plan (CPP) contributions and pay Employment Insurance (EI) premiums for employees (and also deduct employee contributions), independent contractors are responsible for making CPP contributions.

H2: How do courts distinguish between employees and independent contractors?

Courts decide whether a worker is an employee or an independent contractor by trying to determine whether the person is in business on their account (independent contractor) or simply providing services for another entity (employee).

To answer this question, courts look at a range of factors, none of which are determinative. The relative weight given to each depends on the particular circumstances of each case. 

Factors include whether the worker:

• and their activities are subject to the control of the entity; 
• provides their own equipment or tools;
• hires their own assistants;
• takes on any financial risk; 
• is able to provide services to other entities; and 
• has the opportunity to profit from the performance of their tasks.

H3: Plaintiff was an employee despite being paid by another company

The recent case of Scamurra v Scamurra Contracting (Scamurra) before the Ontario Superior Court of Justice provides an example of how the court undertakes such an analysis.

The plaintiff worked full-time for a family company that provided disposal services. He drove a company truck, delivering and retrieving garbage bins from customers. He also hired part-time drivers, dispatching them to locations using a company phone. He had no written contract, but the company argued that he was an independent contractor because payments were made to the plaintiff by another family company that invoiced the disposal company for the plaintiff’s work.

Justice Petersen decided that the plaintiff was an employee. Her Honour found that the company provided all the required equipment, the plaintiff hired drivers but on behalf of the company, the plaintiff was not exposed to any financial risk and did not share in the company’s profits, and the plaintiff worked exclusively for the company for seven years. 

The fact he was paid via another company, while relevant, was not determinative. Her Honour explained that compensation regimes may be structured differently for reasons other than relating to the existence of an employment relationship. In this case, the evidence showed that the disposal company paid the plaintiff through another company to conceal his income from claims by his ex-wife in family law litigation. While this was “deceitful and condemnable,” it didn’t impact whether the plaintiff was an employee or an independent contractor.

Why does worker classification matter?

Employers who misclassify an employment relationship, whether deliberately or in error, run the risk of expensive litigation and fines.

Potential claims by employees

An employee may bring a wrongful dismissal claim, even if classified by a contract as an independent contractor. They may be entitled to a period of common law reasonable notice. The court may also require back pay for other things, such as unpaid vacation pay.

For example, in the Scamurra case, the plaintiff was not given sufficient notice of termination and was wrongfully dismissed. The judge awarded the plaintiff a 22-month notice period, which, even after being reduced by six months to reflect the period the plaintiff returned to work for the disposal company, was still an award of approximately $120,000.

Possibility of fines under the ESA and other penalties

Employers may also be liable for extensive fines if they misclassify an employee. Under the ESA, misclassifying an employee as an independent contractor is prohibited. The maximum fine for a first offence for a corporation is $100,000.

In addition, penalties may be levied by other agencies. For example, employers may be pursued by the CRA for failing to pass on income tax, CPP contributions and EI premiums for employees.

Contact Haynes Law Firm in Toronto for Advice on Proper Worker Classification

Worker classification has important implications for both workers and organizations. Haynes Law Firm mitigates the risk for employers by ensuring all employment relationships are correctly classified by properly drafting employment contracts and designing internal policies concerning various employment relationships. The firm also helps workers obtain employment entitlements if misclassified as independent contractors.

Paulette Haynes, a preeminent Toronto employment lawyer, has considerable experience in the classification of employees. To discuss how Haynes Law Firm can assist you or your organization, please contact us online or by phone at 416-593-2731.