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Contracting in the gig economy

As freelance employment grows, the legal distinction between a contractor and employee has evolved
Labour & Employment Legal Report
|Written By Elizabeth Raymer
Contracting in the gig economy
Tara Hardy

Once upon a time — in our own land, not far away — a person went to work for a company or set up their own practice, and they stayed for 30, 40, even 50 years. During their years of employment, they were provided with vacation pay, sick leave, health-care benefits and, typically, a pension plan, for when they finally shuffled off the 9-to-5 coil, perhaps with a gold watch.

But that was another era. In recent decades, workers — including baby boomers — have become increasingly mobile. Permanent jobs still exist, but “contracts” or temporary jobs are increasingly common. And a worker’s classification is no longer simply employee or contractor but rather employee, dependent contractor and independent contractor — with some workers showing up to the same job in the same workplace for years as “freelancers.”

To some extent, this change has been driven by generational differences.

“The new generation in the workplace sees [contract work] as freedom, flexibility, and with technology, too, the idea of going to one employer for 30 years is long gone,” says Lisa Stam of SpringLaw in Toronto, a Canadian virtual law firm advising on workplace legal issues for employers and executives.

“The gig economy . . . is also being driven by individuals who like that freedom,” she adds. “It’s a generational change. Millennials are very open to it. We’ll see if that continues to be the case as [Millennials] take on mortgages” and other financial responsibilities of mature adulthood. “Maybe that will change. But there’s a confidence in the new generation that they can take care of their affairs [and] more of an openness to being in charge of their own destiny.”

With this shift, employment legislation and the law have had to likewise shift gears.

“It’s art,” says Richard Charney, global head of employment and labour for Norton Rose Fulbright LLP, based in Toronto. “Judges are evolving this jurisprudence” of who constitutes an employee, dependent contractor or independent contractor and how each should be treated under the law.

Charney sees “more and more activity and a desire of the courts and possibly legislatures to protect vulnerable workers who have the trappings of a contractor but are very dependent” on an employer. “There’s been the odd judicial comment on the latter point: Just because you’re not full time and have a couple of employers, that doesn’t mean you’re an independent contractor.”

An employee is, broadly speaking, someone employed for wages or salary under a contract of employment, who is under the control of the employer and has an implied term of reasonable notice if their services are terminated.

In contrast, a plumber who shows up to your house to do a job and then invoices you for that work is a classic example of the independent contractor, says Barry Fisher, a mediator and arbitrator of employment and labour relations matters in Toronto.

But, some time around the early 1920s, he says, a new category emerged — that of the mercantile agent. This was a person appointed by those in business to act on their behalf or to represent them in dealing with other persons. The understanding in law that developed around mercantile agents was that they were not employees, but they were still entitled to notice of termination.

Today, says Fisher, the “implied term is dependent contractor” and those relationships may only be terminated on reasonable notice. Although at one time a dependent contractor could be given less notice than an employee, “that is no longer good law,” he adds, citing the Court of Appeal for Ontario decision Keenan v. Canac Kitchens Ltd., which found that the plaintiffs in the case — one of whom had worked for the company for 33 years — had been dependent rather than independent contractors and as such were entitled to reasonable notice (which the trial judge fixed at 26 months’ notice for both plaintiffs, upheld on appeal).

For contractors, however, the doctrine of reasonable notice can be offset by reasonable language in the contract; this does not apply to employees, for whom the minimum requirements of notice under employment standards legislation must be met, Fisher notes. Under the Canada Labour Code, he adds, dependent contractors are considered employees, though federal labour standards apply only to federally regulated employers and employees.

In Ontario, The Changing Workplaces Review, which resulted in Bill 148 to amend the Employment Standards Act, stopped short of integrating dependent contractors into the definition of “employee” in the provincial Employment Standards Act. “Ontario had an opportunity to do it right and didn’t,” says Fisher.

Charney notes that case law suggests a dependent contractor might have a diminished entitlement compared to an employee in the event of termination.

He notes two decisions, one from British Columbia and one from Ontario, that established tests for whether a worker is an employee or a contractor. Glimhagen v. GWR Resources Inc., written by Justice Peter Rogers of the B.C. Supreme Court, sets out a seven-part test, while the Ontario Court of Appeal’s decision in McKee v. Reid’s Heritage Homes Ltd. looked at five factors.

The first five questions were common to both the B.C. and Ontario approach, says Charney. In Glimhagen — which sought to determine whether the plaintiff, during his first 21 years working for the employer, had been an independent contractor, a dependent contractor “or, if he morphed from the former to the latter” — the first five test questions were listed as:

  1. Whether the agent was largely limited exclusively to the service of the principal;
  2. Whether the agent was subject to the control of the principal, not only as to the product sold but also as to when, where and how it was sold;
  3. Whether the agent had an investment in or interest in the tools necessary to perform his service for the principal;
  4. Whether by performing his duties the agent undertook risk of loss or possibility of profit apart from his fixed-rate remuneration;
  5. Whether the agent’s activity was part of the principal’s business organization. In other words, “whose business was it?”

Those are five tests common to most judicial analyses of a worker’s employment status, Charney says. However, the B.C. Supreme Court added two more factors in Glimhagen, which drew on the B.C. Court of Appeal’s decision in TCF Ventures Corp. v. The Cambie Malone’s Corporation. Those were:

Whether the relationship was long-standing — the more permanent the term of service the more dependent the contractor; and

Whether the parties relied on one another and closely co-ordinated their conduct.

“Number 6 is interesting because it has a temporal aspect,” Charney says. “If it’s fleeting and temporary,” it may be a contractual relationship or that of an employer with an independent contractor. “But if it’s more a long-term and permanent relationship, it’s probably more one of employment” or employer/dependant contractor. In Glimhagen, the plaintiff was found to have had a 12-year period of service as a dependent contractor and employee and was awarded $78,000 in damages for breach of contract.

And in the age of the piecemeal/Uber economy, Charney says, he has noted more litigation in Canada and elsewhere.

Class action lawsuits have been launched recently by contractors who range from lawyers to car drivers, notably against Deloitte Management Services and Uber Technologies. Andrew Monkhouse of Monkhouse Law in Toronto is one of the counsel representing plaintiffs in Sondhi v. Deloitte Management Services LP, a class action in which plaintiffs were contractors working for a company called ATD Legal Services, which provided document review for law firms.

“There’s been more of a movement toward outsourcing [these functions] in the industry,” says Monkhouse.

After ATD was purchased by Deloitte, the legal document reviewers launched a class action lawsuit to be declared employees instead of independent contractors and sought compensation for unpaid vacation, unpaid statutory holiday pay and unpaid overtime. Justice Paul Perell of the Ontario Superior Court of Justice finalized certification of the common issues against the Deloitte defendants in January.

Class action plaintiffs normally seek overtime pay, vacation pay and statutory holiday pay, as well as Canada Pension Plan and Employment Insurance payments on their behalf, says Monkhouse. “If it’s found they’ve been misclassified, they’d be owed all this.” Contractors are not owed overtime, but employees are, and dependent contractors are also owed notice of termination. Benefits are payable to employees only, he notes.

“More recently, judges have been more willing to certify” these types of class action, he says, and courts have been more willing to certify “misclassification” suits.

In Heller v. Uber Technologies Inc., the agreements between the class plaintiff and Uber included an agreement to arbitrate disputes, and Uber successfully moved to have the proposed class action stayed in favour of arbitration in the Netherlands. The decision by Perell to stay the proposed class action is under appeal.

Another class action, Omarali v. Just Energy, was certified in 2016. In that case, Justice Edward Belobaba of the Ontario Superior Court found that many of the “independent contractors” selling hot-water heaters door to door on commission “were making less than minimum wage,” says Monkhouse.

And in Rosen v. BMO Nesbitt Burns Inc., the plaintiff investment advisors said they had been misclassified as independent contractors rather than employees and claimed unpaid overtime. The settlement, achieved after two days of mediation in 2016, saw the defendant pay $12 million for class member compensation and $500,000 to cover the costs of administration.

With legal fees so high in class actions, “there can be a chilling effect on people to bring claims, unless they are quite strong,” says Monkhouse. In the Deloitte suit, however, “we won that motion [for certification] after two days of hearings and were awarded $353,000 in legal fees,” representing a partial amount of class counsel’s fees. Counsel was pleased in that case, because the system of having plaintiffs pay costs “discourages otherwise meritorious class actions,” he says.

“Our employer clients are paying more attention to how they’re classifying people,” says Stam. “Especially in the gig economy — and the startup world especially — you’re not ready to be an employer initially.”

To avoid litigation, employers must draft contracts carefully. “If you want to establish an actual, real contractor relationship, there’s some important language to include,” she says, as the “common-law default will be” employee status. In November 2017, Ontario’s Bill 148 created a default classification, she notes, which put the onus on an employer to prove that an employer-employee relationship did not exist.

Contractors should issue an invoice each month, for example, and it must be clear who’s providing the tools. “Working remotely doesn’t make you an independent contractor,” says Stam.