Exclusivity: Dependent or Independent Contractor, The Lawyer’s Daily (July 20, 2022)

(this article originally appeared in the Lawyer’s Daily on July 20, 2022)

By Nikolay Y. Chsherbinin

Employment law contemplates an intermediate category of “dependent contractor” between employee and independent contractor status. A dependent contractor relationship is a non-employment relationship in which there is a certain minimum economic dependency, which may be demonstrated by complete or near complete exclusivity.

Much like with employees, workers in this category are owed reasonable notice upon dismissal. Exclusivity is a hallmark of the dependent contractor category. Minimum economic dependency standard is a vaguely worded standard and its application produces outcomes that are highly context-specific. An employment case in point is 1159273 Ontario Inc. v. The Westport Telephone Co., 2022 ONSC 1375 (Westport), where the court determined that the billing percentages between 52 per cent and 71 per cent did not amount to exclusivity.

Nearly 100 years ago, in 1936, the Court of Appeal for Ontario in Carter v. Bell & Sons (Canada) Ltd., 1936 O.J. No. 203, recognized the existence of an intermediate category: “where the relationship of master and servant does not exist but where an agreement to terminate the arrangement upon reasonable notice may be implied.” Several Canadian jurisdictions have since found such intermediate workers in a number of reasonable notice cases, particularly where the worker is economically dependent on the employer, generally due to complete exclusivity or a high-level of exclusivity in their work.

In McKee v. Reid’s Heritage Homes Ltd., 2009 ONCA 916, the Court of Appeal for Ontario explained: “exclusivity is determinative, as it demonstrates economic dependence.” In Keenan v. Canac Kitchens Ltd., 2016 ONCA 79, the same court added that exclusivity cannot be determined on a “snapshot” approach, because it is integrally tied to the question of economic dependency. Therefore, a determination of exclusivity must involve a consideration of the full history of the relationship.

In Thurston v. Ontario (Children’s Lawyer), 2019 ONCA 640, the Appeal Court clarified that exclusivity is a categorical concept. It poses an either/or question, and “near-complete exclusivity” must be understood with this in mind. It explained that the “near-complete exclusivity” cannot be reduced to a specific number that determines dependent contractor status; additional factors may be relevant in determining economic dependency. But “near-exclusivity” necessarily requires substantially more than 50 per cent of billings.

This brings me to Westport, which involved a family business, WTC, ran by two brothers, Tom and Steve Lynn. The business included several related businesses: bus lines, a cable company and fibre optics facilities. Both brothers were principals of WTC, initially as individual shareholders. From 1977 to 1996, Tom personally provided services to WTC as an employee. As business grew, Tom and Steve incorporated to hold their shares and receive remuneration. This structure was recommended by their chartered accountants and lawyers for taxation and estate planning purposes.

From 1996 until his dismissal, Tom’s nature of service did not change, although in 1996 he began providing services to WTC via his corporation, 115. From 1996 until 2014, 115 held an ownership interest in WTC between 21.5 per cent — 29 per cent. In February 2014, 115’s shares of WTC were transferred to a non-arm’s length company, 240, which shares were subsequently sold to arm’s length to a third party in September 2019. It seems that Tom’s sales of shares upset his brother and their relationship suffered, ultimately resulting in Tom’s dismissal on Nov. 4, 2019.

In response, Tom’s company, 115, brought a wrongful dismissal action against WTC, where it argued that it was a dependent contractor for WTC. The court disagreed and dismissed both a motion for summary judgment and the action. The principal issue on the motion was whether 115 was a dependent or independent contractor.

The court found that between 1996 and 2013, Tom’s company, 115, received approximately between 52.83 per cent and 71.48 per cent of its revenue from WTC. However, these billing percentages did not amount to exclusivity, because Tom/115 earned additional income including dividend income and rental income from other sources. The court further found that from 2011 to 2013, 115’s percentage of work done for WTC reached over 88 per cent, and as such there was exclusivity in those years, but it nevertheless declined to find that Tom/115 was a dependent contractor.

The court reasoned, perhaps surprisingly, that Tom used 115 “as an instrument to direct income based on estate and tax planning strategies, as directed by professionals.” This begs a vexing question: why does it matter, if more than 70 per cent of 115’s revenue came from WTC? The court explained: “[w]hile it may appear that 115 was economically dependent on WTC, that would only be on a snapshot basis. From a historical and contextual perspective, the court finds that 115 was not economically dependent on WTC and if it was, such a design was made in consultation with Tom and his professional advisors. The court finds that any attempt to design a mechanism to make 115 look economically dependent on WTC should not be allowed.”

The court’s assessments are troubling. Firstly, a person’s employment can be inextricably interwoven with his or her position as a shareholder, employee, director and partner, where each role comes with its own set of rules. With that interweaving of roles, the employee can still be entitled to reasonable notice at common law, provided in the Court of Appeal’s words in Thurston that: “substantially more than 50 per cent of billings” come from the employer. In this case, Tom/115’s relationship with WTC had morphed into a dependency, because of a long history of exclusive or near-exclusive dependency. In this regard, the court found that Tom “worked full-time for the Defendant (on average 40 hours or more per week).” It further found that once Tom incorporated 115: “the nature of the services did not change. …”

Secondly, the fact that Tom provided his services through 115 is equally irrelevant, because it was a legitimate mechanism that was recommended to him by accountants and lawyers, and was set up as the court found for “taxation and estate planning purposes,” and not to create an economic dependency on WTC. There are a number of lawyers that provide legal services for law firms through their professional corporations. Are they creating a self-induced economic dependency on the law firm, because they are, typically, not allowed to provide legal services on behalf of other firms or do they simply utilize an available legal mechanism, much like Tom did, for the taxation purposes?

Thirdly, the additional income that Tom earned was not from third parties, but from companies related to WTC and most of his income was in the form of investment income, partly consisting of WTC’s dividends. So, take for example a commission salesperson, who owns rental properties from which he earns passive investment and rental incomes, their financial circumstance may be used against him in order to disqualify him as a dependent contractor and correspondingly deprive him of severance.

When it comes to the dependent contractor category, the concept of self-induced economic dependency must be applied with due caution. Arguably, it should only play a role in cases where the economic dependency had a short history and where there was no express or implicit understanding that the employer would provide the worker with a minimum or any level of work. However, where the working relationship spans 42 years, as in Westport, any assertion that the worker’s economic dependency is “self-induced” seems misplaced. Instead, the dependency appears to be “self-evident.”

In Anna Karenina, Leo Tolstoy wrote: “happy families are all alike; every unhappy family is unhappy in its own way.” When a family feuds, business goes awry, resulting, in some cases, in wrongful dismissal lawsuits by family members.

Westport makes one wonder if 70 per cent of billings does not amount to exclusivity or near-exclusivity, what percentage would? It also serves as a reminder that it takes more than just a contract to establish an independent contractor relationship. Courts would scrutinize the nature of the parties’ relationship from both historical and contextual perspectives, where the economic dependency is one of many factors that they would consider.