Canada: An Employee In Consultant’s Clothing?

Liability may exist, despite the intention of the parties.

There is a trend in the modern workforce towards outsourcing non-core business competencies to professional service providers, consultants and other independent contractors. Whether a business engages a consultant to obtain highly specialized skills, or to avoid the costs and potential claims associated with the employment relationship, there is always an underlying risk that the consultant may later be deemed an employee. The costs associated with such a determination for a business can be substantial. They include—among other things—liability for penalties and interest under the Income Tax Act (Canada), liability for workplace safety and insurance premiums, health tax premiums, damages for wrongful dismissal on termination of the agreement, and employment standards entitlements.

Notwithstanding the risks, independent-contractor agreements remain a valuable business management mechanism, motivating corporations to go to great lengths to structure their relationships with individuals so that on paper they remain independent contractors. The courts have generally held, however, that it is the substance of the relationship, rather than the form, that dictate whether an independent contractor will be treated in law as an employee.

In a recent decision, the Federal Court of Appeal¹ ruled that the intentions of the parties to a contract purportedly for services should not be ignored in characterizing their relationship. Nevertheless, courts consistently disregard the intentions of consultants and the companies purchasing their services.

In July 2006, the Ontario Superior Court² demonstrated just how little credence the courts are willing to give to formal structure and expressed intent. Braiden was a commissioned sales agent whose incorporated company entered a written consulting agreement with Lay-Z Boy; the agreement expressly stated that the parties did not intend to enter an employment relationship. Under the agreement, Braiden’s company was liable for all statutory deductions and withholdings related to employment, including Employee Health Tax, Workplace Safety and Insurance premiums, Canada Pension Plan and Income Tax. Braiden’s company was also responsible for setting up its own office and all of the expenses related thereto. Nevertheless, when Lay-Z Boy terminated the agreement between it and Braiden’s company in accordance with the terms of the agreement, Braiden commenced an action for wrongful dismissal. In deciding the case, the court chose to look past the formal arrangements, the expressed intention of the parties, and the additional compensation arguably attributed to Braiden in return for providing his services as an independent contractor, and deemed Braiden to be an employee, awarding him twenty months’ pay in damages for wrongful dismissal.

Based on the recent case law, it remains imperative that businesses seeking the services of consultants and independent contractors structure their relationships with such service providers to be in both substance and form that of vendor and purchaser of services. This is essential not only when drafting the initial agreement, but also in the ongoing maintenance of the relationship. In addition to drafting an agreement that clearly communicates the intentions of both parties not to deal as employer/employee (and that carefully addresses the termination obligations of the parties), in the day-to-day fulfillment of the contract, independent contractors should be given the maximum degree of freedom to provide the services in question when, how and where they choose. Independent contractors should also be free to sell their services to other purchasers in the marketplace and any post-termination restrictions on such a capacity—through non-solicitation/non-competition provisions, for instance—should be avoided as much as possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.