Court Rules that “Dependent Contractors” are Entitled to Termination Notice

One of the most important workforce distinctions that employers must make is between employees and independent contractors. Per the Ontario Employment Standards Act, 2000, generally speaking employees:

• Do not provide their own tools, materials or equipment to do their work.
• Are paid a fixed rate (e.g. salary) that is not dependent on how they work, or how quickly they work.
• Do not establish deadlines for their work, or determine where and how the work is done.
• Cannot subcontract work to another person.
• Are subject to appropriate disciplinary action, such as suspension or dismissal.

Generally speaking independent contractors:

• Own and are responsible for the tools, equipment and other items they need to perform their job.
• Are in business for themselves and can either make a profit or risk losing money.
• Can determine how and where work is completed.
• Can subcontract some work.
• Cannot be disciplined, but can have their contract terminated.

What makes the distinction between employees vs. independent contractors especially challenging — and has led to numerous complaints and lawsuits over the years — is the fact that the there is overlap and “grey area” between the two categories.

For example, some employees have an incentive to work faster, or may be able to earn more income if they exceed targets (e.g. sales reps, customer service agents). Conversely, some independent contractors cannot subcontract work due to the nature of the engagement or because of security issues, and sometimes they may use their client’s equipment and tools (e.g. online project management software, corporate-owned tablets and smartphones, etc.).

Horseshoes, Hand Grenades…and Dependent Contractors?

The old saying goes that “close enough” only matters for horseshoes and hand grenades. However, the B.C. Supreme Court recently added a third example to the mix: dependent contractors, which are independent contractors who are close enough to being employees that they are entitled to termination notice, or severance in lieu of appropriate notice).

Here is the back story: In 2015 MDE Enterprises, an electrical contractor in Vancouver, terminated the services of a sheet metal estimator, Rudy Pasche, who started working for the company as an independent contractor in 1997.

However, Pasche claimed that his relationship with the MDE Enterprises evolved over his 18-year tenure, and for much of that time he was treated like an employee. He also routinely worked 40+ hours a week, alongside his full-time employee colleagues. Based on this, Pasche sued MDE Enterprises for wrongful dismissal.

Ultimately, the case made its way up to the B.C. Supreme Court, which in May 2018 determined that while Pasche was not an independent contractor, he was not truly an employee either. Instead, he was in between the two — a.k.a. a dependent contractor — which was close enough to being an employee to warrant severance pay in lieu of termination notice. Based on this ruling, the court awarded Pasche 13 months of back pay, which amounted to $46,000 (had the court determined that Pasche was entirely a full-time employee, he would have been awarded 18 months per his 18-year engagement with MDE Enterprises).

The Takeaway

 The courts have made it clear that the distinction between employee, independent contractor — and now “dependent contractor” — is largely based on what actually happens in the relationship between workers and employers, rather than what is printed in an agreement, or what the parties have informally or formally agreed to.

As such, employers are urged to audit all of their independent contractor relationships and agreements, in order to verify that the classifications are still valid and in compliance with prevailing legislation. Otherwise, they could find themselves cutting a large cheque for legal costs and court-awarded damages, eroding trust and goodwill across their workforce, and like MDE Enterprises making headlines for all of the wrong reasons.

Learn More

To learn more, contact PIVOTAL today. Our consulting specialists will work closely with your management group and human resources team to ensure that all members of your workforce are properly classified, and that any classification errors are proactively and properly resolved.