Employers are generally familiar with the distinction between an employee and an independent contractor. However, many may not be aware that there is a third category recognized by our courts – that of the dependent contractor.
When placed on a continuum, the dependent contractor falls between an employee and an independent contractor.
Who is a Dependent Contractor?
- A dependent contractor is a contractor that is economically reliant on one principal.
- Regardless of how the parties choose to label the relationship, the courts will “look behind” the label that the parties have used, to determine its true nature.
- The main factor that a court will consider in determining whether a contractor is dependent or independent, is whether the contractor is working predominantly for one principal.
Why should employers be concerned about Dependent Contractors?
If the relationship between a contractor and the principal is found to be “dependent”, the dependent contractor must be provided with reasonable notice of the termination of the relationship. If notice of termination is not given, a dependent contractor can sue the principal, in much the same way that an employee can sue his/her employer for wrongful dismissal.
The following case out of Ontario, shows how costly it can be for an employer, when an independent contractor is deemed to be a dependent contractor.
Keenan v. Canac Kitchens Ltd., 2016 ONCA 79
In this case, Mr. and Mrs. Keenan initially worked for Canac Kitchens as employees. Then in 1987, Canac Kitchens changed their status to that of contractors.
As contractors, the Keenans: hired installers; paid the installers money given by the company; were responsible for damage to cabinets during transit; and carried their own insurance. Canac Kitchens paid them on a piece work basis and their pay was not subject to any statutory deductions. Their agreement did, however, require them to devote their “full-time and attention” to Canac Kitchens.
Between 1987 and 2007, 97.5% of the Keenans’ income came from Canac Kitchens as they worked almost exclusively for them. In 2007, the Keenans also started working for Cartier, which was a competitor of Canac Kitchens, when there was insufficient work. Nevertheless, most of the income that the Keenans earned after 2007 (about 66%-80%) continued to come from Canac Kitchens.
In 2009, Canac Kitchens terminated the relationship.
The Keenans sued Canac Kitchens and the main issue was whether the Keenans were dependent, or independent, contractors.
Court’s decision
Based on the “exclusivity” of their service to Canac Kitchens in all but two years and their economic dependency on Canac Kitchens, the court held that the Keenans were dependent contractors and that the reasonable notice period was 26 months.
The court rejected Canac Kitchens’ argument that the Keenans were not dependent because they had worked for Cartier during the two years immediately preceding the termination of the relationship.
The court stated that “Exclusivity cannot be determined on a “snapshot” approach because it is integrally tied to the question of economic dependency. Therefore, a determination of exclusivity must involve… a consideration of the full history of the relationship.”
Employer Tips
To minimize liability in the event a contractor is found to be a dependent contractor, employers should take the following steps:
- Have clear, concise, written agreements.
- If the contractor is hired for a fixed term, the contract should clearly state the start and end date. The contract should also clearly state the notice to be given in the event the relationship is terminated before the end date.
- If the contractor is hired for an indefinite period, the agreement should have an unambiguous termination clause which sets out the notice that will be given.
- The termination provisions of the contract should reflect, at a minimum, the notice periods set out in applicable employment standards legislation.
- To the extent possible, try to ensure that the contractor does not work exclusively or predominantly for your organization.
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