Is a new test emerging for worker classification?

Workers are usually categorized as an employee or a contractor. Each category comes with its own distinct set of entitlements and obligations. Generally speaking, a contractor is someone in business for themselves, while an employee works for the benefit of another’s business.

As our firm has discussed in an earlier post for First Reference Talks, it can be challenging to properly classify a worker. This may be made worse by the potential for an individual to be simultaneously considered a contractor for tax purposes, yet an employee for workplace standards.

Typically, the tax court places greater emphasis on the parties’ intention in structuring their working relationship, while employment tribunals (and the courts when addressing employment matters) tend to look beyond the parties’ formal intentions to the functional nature of the relationship.

A recent decision from the Court of Appeal for Alberta, Gerling v. Camrose Regional Exhibition & Agricultural Society, 2022 ABCA 210 (“Camrose”), appears to challenge this traditional dichotomy, and may signal a potential shift by the civil courts to being more in line with the tax court approach.

In Camrose, the Plaintiff began working for the business as a volunteer, but later progressed to the role of chief executive officer (“CEO”). As CEO, the Plaintiff provided services to the business through a corporation (“Papa-T”) pursuant to a management services agreement (“MSA”). The term of the MSA was renewed three times and the Plaintiff received monthly payments for his services, plus GST.

In January 2018, the business terminated the MSA for cause. The Plaintiff sued in response, asserting he had been engaged as an employee and was entitled to damages for wrongful dismissal and breach of contract as a result. The trial judge accepted this argument and, having found the Plaintiff to be an employee, ordered both wrongful dismissal damages and aggravated damages (paid to Papa-T), on the basis that the grounds for termination were untrue.

The Defendant appealed this ruling, in part, on the basis that the court had erred in finding the Plaintiff to be its employee.

The Court of Appeal granted the appeal on this point, finding that the Plaintiff had operated as an independent contractor. In reaching this conclusion, the Court of Appeal placed significant emphasis on the terms of the MSA and the parties’ intentions in defining their relationship.

In particular, the Court of Appeal stated that the parties’ understanding of their legal relationship at the time of contract formation should “be accorded significant weight.” The Court also noted that:

1.      Papa-T was incorporated by the Plaintiff to contract with the Defendant and to keep this work separate from the Plaintiff’s shoe store company;

2.      The Plaintiff asked to be a contractor;

3.      It was the Plaintiff’s decision to have the MSA structured as a fixed-term contract between Papa-T and the business to avoid “the negative tax consequences associated with being an employee”;

4.      The MSA:

a.      required that the Papa-T furnish “at its own expense and cost all necessary labour”, and be responsible for the cost of its own office premises (including rent and utilities);

b.      permitted Papa-T to be engaged in other business activities which did not materially conflict with those of the Defendant;

c.      provided that the fees for service were paid directly to Papa-T, plus GST, by way of monthly installments; and

d.      included express language making clear that there was to be no employment relationship between the parties.

Takeaway for Businesses

This decision is an important reminder to be careful what you bargain for. It is always best practice to ensure written contracts align with the true nature of the parties’ relationship. While the courts will generally look to provide a just and fair resolution, in circumstances where a party has bargained to have a relationship structured in a manner of their choosing, they should expect to live with that decision. In Camrose, the court reminds parties that written contracts have meaning and cannot simply be ignored after-the-fact because one party decides they are unhappy with the resultant bargain.

Businesses that engage contractors should take steps to ensure the formal description of the relationship is consistent with reality. To further protect against allegations of an employment relationship after-the-fact, businesses may look to the court’s decision in Camrose for guidance. In particular, reduce terms to writing and include contractual provisions addressing the contractor’s freedom to work elsewhere, to provide their own tools and equipment, and to invoice for services.

Finally, we have recently seen changes to the law in Ontario which places statutory restrictions on when business and IT consultants may be considered to be employees. This framework should also be considered, as appropriate, to ensure relationships are set up in a clear and lawful manner. For more on these restrictions, see here: https://bit.ly/3mu3rDo.

This article was originally published on April 14, 2023 at First Reference Talks.

Vey Willetts LLP is an Ottawa-based employment and labour law firm that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in Ottawa and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or info@vwlawyers.ca.