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2013-11-14 00:21:42

When are Contractors Considered to be Employees by Canada Revenue Agency?

When are Contractors Considered to be Employees by Canada Revenue Agency?

 A decision from the Ontario Court of Appeal (OCA) may have sent shivers down the backs of employers who have had long standing relationships with what they feel are “independent contractors”.  These types of relationships can be at odds with the view of the Canada Revenue Agency( "CRA").

The decision in McKee v. Reid’s Heritage Homes Ltd. clarifies the common law test on whether or not those contractors are actually employees and are thus entitled to severance payments.  The case looks at the nature of the relationship between two parties and determines if the worker, either as a natural person or a corporation, is a contractor or an employee. In the McKee decision, the OCA affirmed the trial judge’s findings that although Ms. McKee provided sales agent services through an incorporated entity and even hired, trained and managed her own sub-agents, nevertheless, she was deemed to be an employee and thus entitled to 18 months notice of termination. 

 The relationship between Elizabeth McKee and Reid’s Heritage Homes (RHH) was one where, for 18 years, RHH would make a certain number of homes available to Ms. McKee to advertise and sell, for which McKee would receive a specific fee.  McKee signed the original agreement on behalf of her company, which she controlled, who then hired, trained and paid sub-agents with whom McKee split the commissions paid from RHH. 

 The relationship between RHH and McKee ended in 2005 when RHH attempted to change the structure of its sales force and the parties could not agree on McKee’s relationship with the company based on the new sales structure.  McKee then commenced an action for wrongful dismissal, claiming entitlement to damages in lieu of reasonable notice even though the original contract signed by RHH and McKee in 1987 provided for termination by either party for any reason on 30 days’ notice.  This is her crux of claiming she was an employee and entitled to notice.

 The OCA confirmed that there is no one conclusive test that can be universally applied, but rather the court must assess the “total relationship of the parties”, taking into account the following factors; (employee vs. contractor)

-          Whether or not the individual was limited exclusively to the services of the principal;

-          Whether or not the individual is subject to the control of the principal, not only as to the service to be provided but as to when, where and how it is to be provided;

-          Whether or not the individual has provided their own tools (in this case McKee was supplied with letterhead and stationary from RHH)

-          Whether or not the individual takes on any risk of profit and loss

-          Whether the activity of the worker is part of the company’s business organization (McKee was determined to be a key component of RHH’s organization)

 Despite what appears to be clear evidence to the contrary, McKee was found to be an employee.  This case demonstrates that although companies may attempt to structure relationships that they feel allow them to hire contractors, upon closer scrutiny from the courts, these relationship may be determined to be one of employer and employee.  This determination, if unexpected, can expose companies and correspondingly Directors of those companies to significant liabilities.  In addition to being held liable for severance, employers can also face liability for failing to withhold and remit source deductions from these employees for income tax, CPP, EI and workers’ compensation.  This type of liability also passes along to anyone purchasing an existing company as a successor employer.  Unpaid wages and un-remitted source deduction are a Directors’ personal liability.

 In insolvency situations workers may find it even more desirable to be classed as an employee verses a contractor.  The Bankruptcy and Insolvency Act, which governs the insolvency process, makes special provisions for unpaid wages for employees but not so for contractors who are lumped in with the balance of unsecured creditors.  Furthermore, in 2008 the so-called “Wage Earner Protection Act” was passed, which has helped to speed up the ease and availability of funds to employees with outstanding wages in a bankruptcy situation.  Further, being determined to be an employee allows an individual to collect employment insurance benefits where, once again, a self-employed contractor would have no such safety net. 

Based on the McKee decision, employers may want to carefully manage and review contracts, especially long-standing service contracts.  As well employers may also want to consider the nature of their relationship with workers; if it quacks like a duck, and walks like a duck, then it’s a duck.  If it is an employer/employee relationship, then treat it as such.