Authored by: Vanessa Glasser, counsel, Ministry of the Attorney General, Crown Law Office Civil, and Vincent Rocheleau, associate, Blaney McMurtry LLP

Introduction

In 2009, the Ontario Court of Appeal in McKee v Reid's Heritage Homes Ltd.1 formulated a two-step test to determine whether a worker was a dependent contractor or an independent contractor in the employment law context. The dependent contactor status was created as an intermediate category to protect workers that were incorrectly classified as independent contractors to limit their entitlements upon termination.2 Since McKee, the courts continue to carefully scrutinize the nature of a working relationship based on the conduct of the parties against their expectations - or the "true substance of the relationship."3  In McKee, the court determined that economic dependence arising from an exclusive or near exclusive work relationship is the hallmark of the dependent contractor status. However, the court did not expressly state that an exclusive work relationship was necessary to be classified as a dependent contractor and, as a result, each case was left to a highly subjective interpretation.

In the past three years, the Ontario appellate courts released four appellate decisions affirming and clarifying the test to determine whether a worker is a dependent contractor. In Thurston v Ontario (Children's Lawyer), the Ontario Court of Appeal confirmed that the exclusivity of a working relationship remains the hallmark of the dependent contractor test and is determinative of the worker's status.4  Thurston  is the third of four post-McKee  appellate court decisions that counsel should consider when advising clients regarding contracts and termination in employment matters. We suggest that Thurston resolves any ambiguity that a lack of exclusivity is determinative and prevents a worker from being classified as a dependent contractor. 

Existence of an Intermediate Category

In 1936, the Ontario Court of Appeal in Carter v Bell & Sons (Canada) Ltd. recognized the existence of an "intermediate" position "where the relationship of master and servant does not exist but where an agreement to terminate the arrangement upon reasonable notice may be implied."5 The court in Carter emphasized the permanency of the working relationship between the parties as a determinant in delineating this intermediate category.6

In the years that followed, the courts in other Canadian jurisdictions then found such intermediate workers in a number of reasonable notice cases, particularly wherein the worker was economically dependent on the defendant, generally due to complete exclusivity or a high-level of exclusivity in their work.7

The Ontario Court of Appeal implicitly recognized the existence of an intermediate category for work relationships involving a distributorship agreement in Paper Sales Corporation Ltd. v Miller Bros. Co. (1962) Ltd.8 There, the court held that a non-employment relationship whereby the plaintiff was "the exclusive distributor of the defendant's products in [two provinces]" was "closer to a contract of employment than to a commission agency" and thereby required reasonable notice for termination.9

In Mancino v Nelson Aggregate Co., the Ontario Court of Appeal applied the reasoning in Paper Sales to self-employed truckers, requiring reasonable notice where the work relationship was permanent and exclusive in nature, such that the plaintiff was in a "position of economic dependence."10 Mancino exemplified the applicability, in Ontario, of the intermediate category analysis beyond merely sales or distributorship relationships.

Finally, in 2008, the Ontario Court of Appeal again implicitly recognized the intermediate category where the case required the court to determine the status of a commissioned salesperson. In Braiden v La-Z-Boy Canada Ltd., Gillese JA noted the trial judge's suggestion that a "third category of relationship had emerged, between [the employer-employee and independent contractor relationship categories], in which reasonable notice of termination must also be given."11

The Test in McKee

In 2009, the Ontario Court of Appeal in McKee formulated a two-step test to determine whether a worker was a dependent contractor:

[T]he proper initial step is to determine whether a worker is a contractor or an employee, [.] The next step, required only if the first step results in a contractor conclusion, determines whether the contractor is independent or dependent, for which a worker's exclusivity is determinative, as it demonstrates economic dependence. Therefore, exclusivity might be a "hallmark" of the dependent contractor category [.] (para 34).

[emphasis in original]

The First Step - Determine whether the worker is a contractor or an employee

a)    Was the worker providing services on his or her own account?

The first step requires the court to follow the pre-established methodology and criteria for differentiating an employee from a contractor, by considering the principles set out in 671122 Ontario Ltd. v Sagaz Industries Canada Inc., Belton v Liberty Insurance Co. of Canada, Montreal v Montreal Locomotive Works Ltd., and Braiden v La-Z-Boy Canada Limited.12

In Sagaz, the Supreme Court of Canada explained that the central question for determining whether a worker is a contractor is if he or she is providing services in business on his or her own account.13

b)    Factors to consider

The Supreme Court of Canada also explained in Sagaz that there is not one conclusive test that can be universally applied to label the status of a work relationship, nor is there an exclusive list of criteria that must be analyzed. Rather, a case-by-case analysis of the relevant factors is necessary to determine the true legal nature of the relationship.14

The courts in Sagaz, Belton, Montreal, and Braiden each provided a non-exhaustive list of factors to consider. These factors include: 

  1. the employer's control of the worker's work; 
  2. whether the worker owned his or her own tools; 
  3. whether the worker had a chance of profit; 
  4. the manner in which parties conducted business: 
  5. whether the worker hired his or her own staff; 
  6. the extent to which the worker assumed financial risk; 
  7. whether the worker invested capital in the enterprise; 
  8. whether the worker had management responsibility; and 
  9. whether the worker worked exclusively for the employer.15

Of the factors set out above, the control factor is most frequently cited in decisions designating a worker as either an employee or a contractor. In the Ontario Superior Court decision of John A. Ford & Associates Inc. (o/a Training Services) v Keegan, the court provided a helpful description of the control factor:

Control over the employee need not be complete in order to establish an employment relationship. Indicia of control include: the ability to decide when, where and by what method the employee will perform his/her work; the ability to determine which customers can be served or sold goods, and which cannot; the requirement that the employee submit activity reports; the employee's ability or inability to attend meetings; assistance and guidance that the employer gives to the employee in connection to the work being performed; the employer's ability to set dress and conduct codes for the employee, and the discipline the employer exercises over the employee for breaches of company policy. The employer's ability to select and dismiss the employee, and the general power to control the employee, are also important factors in determining the existence of an employment relationship.16

The Ontario Superior Court of Justice in Cormier v 1772887 Ontario Ltd., recently clarified that the court must consider the factors in the overall context of: 

1. the intentions of the parties; 

2. how the parties themselves regarded the relationships; 

3. the behaviour of the parties toward each other; and 

4. the manner of conducting their business with one another.17

The Second Step - If the worker is a contractor, is he or she dependent or independent?

a)    Factors to consider

The second step is required only if the first step results in a finding of a contractor relationship. This step requires consideration of three factors, namely: 

1. economic dependence, 

2. exclusivity, and 

3. permanency.18

b)    All factors must be considered, however exclusivity is determinative

In McKee, the Ontario Court of Appeal moved away from the original analysis that prioritized the permanency of the working relationship. Instead, the court determined that a worker must be classified as a dependent contractor if they are economically dependent on the employer, which can be demonstrated by complete or near complete exclusivity.19While the court made it clear that exclusivity or near exclusivity was sufficient to ground a finding of dependent contractor status, the court did not expressly rule that exclusivity or near exclusivity was necessary for a worker to obtain that status. However, it is important to note that since McKee, the court has only found workers to be dependent contractors if the worker worked exclusively or nearly exclusively for an employer.

Nonetheless, permanency remains a factor that must be considered.20 Specifically, lower courts have surmised from the factors identified in McKee that the more exclusive and permanent a contractor relationship, the more it resembles an employee relationship that should result in a finding of dependent contractor status.21  A high level of exclusivity and permanency together are strong indicators that a worker is a dependent contractor.

c)     Additional indicia of the worker's status must be considered

The court must also consider additional factors that reveal the true substance of the work relationship.22 As in the first step of the test, there is not one conclusive factor that can be universally applied to label the status of a working relationship. The court may consider any additional factors that allow it to fully understand whether the working relationship resembled that of an independent contractor or an employee. Counsel are strongly encouraged to address any additional relevant factors that would reflect or provide context of the expectations of the parties and the actual working arrangements. 

In Thurston, Ontario provided the following list in support of its argument that the worker was an independent contractor:

  1. the Respondent decided which cases she worked on for the Office of the Children's Lawyer ("OCL");
  2. the Respondent was not subject to daily, weekly, or monthly supervision of the OCL;
  3. the Respondent could turn down OCL files;
  4. the OCL was not obligated to assign a minimum number of files;
  5. the Respondent was not permitted to use OCL letterhead in her correspondence;
  6. the Respondent did not have an OCL email address;
  7. the Respondent did not attend OCL staff events or OCL staff meetings;
  8. the Respondent hired her own staff;
  9. the Respondent retained her own clients, aside from OCL files;
  10. the Respondent used her own tools, supplies, and equipment;
  11. the Respondent set her own hours and controlled her own schedule;
  12. the Respondent had her own office and rent obligations;
  13. the Respondent had her own promotional materials;
  14. the Respondent purchased her own billing software; and
  15. the Respondent paid for her own law society fees and insurance fees.

Summary of Post-McKee Appellate Court Decisions

Keenan v Canac Kitchens Ltd.23 - Abandon the snapshot approach

The Court of Appeal clarified in Keenan  that exclusivity cannot be established using a "snapshot" approach because it is tied to the question of economic dependency.24

The plaintiffs, Mr. and Ms. Keenan (the "Keenans"), worked exclusively for Canac Kitchens Ltd. ("Canac"), from 1976 and 1983 respectively until 2007. From 2007 to 2009, the Keenans also worked for Cartier Kitchens, a competitor of Canac because the work from Canac had slowed down. In 2009, the Keenans's working relationship with Canac was terminated because Canac was closing its operations. The Keenans received nothing upon termination. 

From 2007 to 2009, the Keenan's work for Canac represented between 66.4% and 80% of their billings.25 In practice, the percentage used to determine whether a worker works exclusively for an employer is the average of annual or monthly billings during the period in question.26 Canac argued that exclusivity should be determined at, or about, the time the working relationship is terminated and that because the Keenans did not work exclusively for Canac in the two-year period preceding the termination of the working relationship, the trial judge erred in finding that the Keenans were dependent contractors. The Court of Appeal disagreed and concluded that a determination of exclusivity must involve a consideration of the full history of the relationship. It is for the trial judge to determine whether, after examining that history, the worker was economically dependent on the company, due to exclusivity or a high level of exclusivity. 

Fisher v 6007325 Canada Inc.27 - Exclusivity cannot be self-induced

The Divisional Court clarified in Fisher that a worker's economic dependency cannot be self-induced. 

The plaintiff, worked for her employer for sixteen months. She did not have a written employment agreement, she was not precluded from contracting with others, she did not receive benefits, she submitted invoices, these invoices had no deductions taken at the source, and the employer did not guarantee a minimum or any level of work. With a few exceptions during the period of her employment, the plaintiff worked exclusively for her employer. 

Despite the finding of exclusivity, Perell J. concluded that because the worker's economic dependency was self-induced, the worker was an independent contractor.

Thurston v Ontario (Office of the Children's Lawyer)28 -  Lack of exclusivity is determinative

The Court of Appeal clarified in Thurston that substantially more than 50% of earnings is necessary for a court to determine that near-complete exclusivity exists and, therefore, a worker is economically dependent on his or her employer. 

In this case, the respondent was a lawyer in private practice. She was retained as one of 400 roster lawyers by the OCL to provide legal services on an 'as needed' basis. The respondent was originally retained in 2002 and continued working as a panel lawyer through a series of agreements until 2015. After the last agreement expired, the OCL did not renew the agreement and gave the respondent one year to wind down the existing files.

The employment agreement was clear: she was not guaranteed any work; was not asked to work exclusively for the OCL; and her contract was for fixed-terms with no right of automatic renewal. The contractor was required to maintain her private practice, had the option to refuse files and had the discretion to complete the work as she deemed appropriate. Furthermore, upon each renewal of her contract she was asked to indicate the percentage of her practice dedicated to OCL files. On average, OCL files represented 39.9% of her total billings. 

Although the court did not specify the percentage of billings required to conclude near-complete exclusivity, our analysis of Superior Court decisions suggests that the required threshold percentage of billings is approximately 70% to 80%.

Cormier v 1772887 Ontario Ltd.29 -  Courts will determine the nature of the working relationship based on the conduct of the parties

The Court of Appeal confirmed in Cormier that exclusivity is key to the dependent contractor test. In this case, the appellant argued that the motions judge erred by focusing on the exclusivity of the parties' working relationship and failing to focus on whether the worker was economically dependent. 

The plaintiff worked for St. Joseph Communications from 1994 to 2017. There was no dispute that she was an employee from 2004 to 2017. Prior to 2004, the plaintiff was employed pursuant to an oral employment agreement. From 1996 and 2004, she worked exclusively for St. Joseph Communications, except in May and November of each year, which were slow periods in her industry, during which time she worked less than 37 hours per week for St. Joseph Communications and did occasionally work for other employers. Nevertheless, the motions judge correctly found that Ms. Cormier's exclusivity was determinative that the plaintiff was a dependent contractor.  The Court of Appeal found that the motion judge clearly held that the worker was not only in an exclusive, but an economically dependent relationship with the employer. The Court noted that the motions judge correctly found that: "[the plaintiff] worked exclusively for [the employer] and practically speaking it was her boss" [.] "[w]hat stands out is that [the plaintiff] had a twenty-three [year] solid workplace relationship with [the employer]."30

Conclusion

The written contract matters

A clear contract identifying the expectations and intended working relationship between the parties is essential. The contract should be reviewed regularly and updated to reflect new expectations and agreements. When the written contract reflects the agreement between parties and the actual relationship, the courts are likely to enforce it. 

In Thurston,  the Court of Appeal noted that "the terms of the contract distinguished lawyers on retainer from OCL in-house lawyers [.] the terms of her retainer made the nature of her relationship with the OCL very clear."31  In addition, the employment contract required panel lawyers to complete a re-application form to be re-appointed to participate in the selection process and potentially be re-appointed. The contract also clearly indicated that a panel lawyer was not guaranteed a minimum number of files and the Children's Lawyer or her designate could unilaterally terminate the contract at any time. Importantly, the court in Thurston clarified that the courts should not intervene when the written agreement between the parties is clear, the worker agreed and understood the terms of the agreement and the parties relied on the terms of the agreement.

The party's characterization of the working relationship is relevant but not determinative

What the parties choose to call their working relationship is another indicator of the worker's status that should be considered in the second stage of the two-step test. However, the courts will determine the nature of the working relationship based on the economic realities and the conduct of the parties.32

Therefore, the written agreement should include obligations that require the parties to conduct their working relationship in a manner that reflects the worker's classification, particularly if the worker is a contractor. Employers need to be able to organize their affairs by depending on written employment agreements. Employers must also be cognizant that some workers are entitled to protection and benefits if the working relationship evolves into an employer-employee dynamic. Workers need to fully understand the terms of the employment agreement and ensure the actual work conditions reflect the terms of the agreement. 

Evidence of a high level of exclusivity and permanency will be very persuasive that a worker is a dependent contractor

Exclusivity remains the hallmark of the dependent contractor test. There are no reported cases in Ontario where the court has identified the worker as a dependent contractor without a finding of economic dependence arising from working exclusively or nearly exclusively for an employer. The lowest percentage of worker earnings sufficient to meet the exclusivity/near-exclusivity threshold appears to be 66.6% of worker's earnings from the target employer..33

Permanency remains an important factor in establishing a dependent contractor relationship. A review of the recent caselaw suggests that an exclusive or nearly exclusive working relationship is a minimum of two years in duration for the worker to be classified as a dependent contractor. The more exclusive and permanent a contractor relationship, the more it resembles an employee relationship that should lead to a conclusion of dependent contractor status.

For a review of post-McKee (2009) employment law cases that demonstrate the application of exclusivity and economic dependence criteria, please see the attached PDF.

About the Authors

Vanessa Glasser is counsel at the Ministry of the Attorney General, Crown Law Office Civil. She works on a variety of matters representing the interests of the Province of Ontario. Prior to becoming a lawyer, Vanessa completed courses in organizational behaviour and worked in the human resources department of an international bank. The author's views do not reflect those of the Ministry of the Attorney General or the Ontario Government.

Vincent Rocheleau is an associate at Blaney McMurtry LLP. His primary practice involves providing clients with insurance coverage opinions and representation in coverage-related litigation. In addition to his work in insurance coverage, Vincent maintains a broad civil litigation and advisory practice. Vincent joined Blaneys after completing his articles with the Crown Law Office Civil. During his articles, Vincent supported Crown Counsel in the matter of Thurston v Ontario (Children's Lawyer). The author's views do not reflect those of Blaney McMurtry LLP

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