Dependent Contractor: The Frankenstein of Employment Law

by Alex Lucifero

Thursday, April 2nd, 2015 at 7:59 pm

What is a Dependent Contractor?

It is common knowledge that when an employee is fired without cause, they are entitled to either working notice, or pay in lieu of that notice. Adequate notice, or pay in lieu thereof, can be expensive – in some circumstances more than one month for every year of service, up to about 24 months. An independent contractor, on the other hand, is not entitled to either notice of their termination or pay in lieu of, unless a written contract says they are.

Many people do not know, however, that there is a legal relationship half-way between an employee and an independent contractor, called a “dependent contractor”, that has many of the hallmarks of an independent contractor but where the worker is entitled to reasonable notice of termination of their work.

In this brief article, I review what makes a worker a “dependent contractor”, and why both workers and employers are wise to understand this ever-emerging Frankenstein monster of employment relationships.

History of an Idea

The concept of “dependant contractor” is certainly not a new one. In 1936, the Ontario Court of Appeal, in the case of Carter v. Bell and Sons (1936), 2 D.L.R. 438 (Ont. C.A.), endorsed the concept of an “intermediate” position between employee and independent contractor for non-employment work relationships “of a more permanent character”, where an agreement to terminate the relationship upon reasonable notice may be implied.

More recently, in 2009, in the case of McKee v. Reid’s Heritage Homes Ltd. [2009] O.J. 5489, the Ontario Court of Appeal recognized the continued existence of “dependent contractors”, who, as a result of their status, are entitled to reasonable notice of termination, or compensation in lieu of such notice. While in McKee, the Court of Appeal ultimately held that the plaintiff was in fact an employee, the case affirmed, or rather, reaffirmed that the status of “dependent contractor” continues to exist in law.

What makes a worker a Dependent Contractor?

To the worker, the status of dependent contractor means having all the powers of an independent contractor (flexibility in tax deductions, divided loyalties to employers, etc.), and the enormous power of requiring reasonable notice of termination of their services. To the employer, the dependent contractor remains attractive because the employer may skirt the responsibility of making CPP, EI and tax deductions, but the surprising horror exists that, if the worker is truly a dependent contractor, they are obliged to give the worker reasonable notice of termination of their services, or pay in lieu thereof.

What then makes a dependent contractor? Like determining whether a worker is an employee or an independent contractor, no single factor will determine the result, but the following factors will be considered by a court if asked by a contractor: “Am I entitled to notice (or pay in lieu of) for termination of my services?”:

  1. Duration/permanency of the relationship. The longer the duration of the relationship, the more likely the finding of a dependent contractor.
  2. Degree of reliance/closeness of the relationship. A high degree of reliance on the company can be a hallmark of the dependent contractor. A marketing or sales representative who is selling only the company’s product is an example of this.
  3. Degree of exclusivity. An exclusive relationship with the company is likely to support the conclusion of dependency. If a contractor is doing a significant amount of work for several different companies, the contractor is probably independent.

What are the benefits of being a Dependent Contractor?

The dependent contractor relationship is ideal for the worker. They gain the benefit of an increased likelihood for making profit, income tax deductions, and greater control over their activities, while receiving the protection of required notice or severance pay when being terminated. Workers are wise not to overlook this category of legal relationship when their services are terminated, and employers are wise to protect (and defend) against such claims if they are unwarranted.

Alex C. Lucifero is an associate lawyer with Samfiru Tumkarin’s Labour and Employment Law Practice Group in Ottawa.

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