One of the most significant mistakes a business owner can make when it comes to engaging a worker is classifying that worker incorrectly. Many business owners are aware that misclassifying an employee as an independent contractor can come with heavy repercussions, including being held liable for the various statutory deductions that should be made for an employee (see our previous post on determining employment status here).
However, fewer business owners seem to be aware that an intermediate category of worker exists between employee and independent contractor. Where a worker is not an employee but is sufficiently economically dependent on a particular client, that worker may well be a “dependent contractor”. The key factor to consider whether a worker is a dependent contractor rather than an independent contractor is “exclusivity”. If the contractor relies heavily on a single client, for a long period of time, this points towards dependent contractor status.
One area in which the distinction between an independent and dependent contractor matters is notice of termination. Where a worker is a dependent contractor, in contrast to an independent contractor, she will be entitled to reasonable notice of termination. Where no such notice is given, the business owner may be held liable for damages in lieu of notice. The Ontario Superior Court’s recent decision in Keenan v. Canac Kitchens (“Keenan”) demonstrates just how significant these damages can be.
In Keenan, the two plaintiff workers had worked for the defendant company for 33 and 26 years respectively. The defendant was in the business of supplying kitchen cabinets. For the first eleven and four years, respectively, the plaintiffs were engaged as employees of the defendant. For part of that time, the plaintiffs were employed as foremen. This initial period of employment ended when the defendant company decided to enter into a new arrangement with the plaintiffs. Under this new arrangement, the plaintiffs would be responsible for and had to pay workers who would install the cabinets, and further, were required to provide some of their own equipment. The defendant also suggested that the plaintiffs incorporate a company through which to provide these services (although the plaintiffs never did) and the plaintiffs were permitted to work for, and did in fact work for, a competing company after the new arrangement commenced. All of these factors seemed to suggest independent contractor status.
So, when the defendant company started experiencing financial difficulties it gave the plaintiffs very little notice that their services were being terminated. According to the defendant, under the terms of the new agreement the plaintiffs were not entitled to any notice – let alone reasonable notice.
The court disagreed, finding that the plaintiffs were in fact dependent contractors. Even though the plaintiffs worked for a competing company and despite all of the other factors that pointed towards independent contractor status, the plaintiffs primarily worked for the defendant and most of the plaintiffs’ revenues were attributable to the defendant. As a result of this reliance on the defendant, the plaintiffs were entitled to reasonable notice of termination. Due to the length of service, the court found that the plaintiffs were entitled to 26 months’ notice – equivalent to damages of $124,484.04.
Thus, Keenan emphasizes that whether or not a worker primarily works for a single client is a critical factor when it comes to determining whether a worker is entitled to reasonable notice from that client. Even if other factors indicate independent contractor status, if the worker is mostly working for one client then termination without reasonable notice may come with a heavy price.