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.