When contractors are actually employees: Tax court ruling leaves caterer with massive bill

Cary Silber thought his Toronto catering-staffing business didn’t have any employees. He thought of his company, AE Hospitality Ltd., as a turnkey operation that connected independent contractors with caterers that needed waiters, bartenders and chefs.

But then the Federal Tax Court ruled in May that the 218 workers he contended were independent contractors are in fact employees, saddling Mr. Silber’s company with a bill for $496,000 –the sum of the employment insurance and Canada Pension Plan contributions that AE Hospitality and its staff should have been making for years.

AE Hospitality had written agreements with nearly all of the people working as chefs and waiters, explicitly spelling out that they were contractors, and that AE Hospitality had no liability for any possible tax obligations. But, much to Mr. Silber’s surprise, those agreements did not decide the matter: The tax court found in favour of the Canada Revenue Agency, ruling that the actual way in which the wait staff and chefs worked meant they were employees.

Outside of Quebec, there’s no statutory definition drawing a distinction between employees and contractors. Instead, common-law precedents are used to decide on employment status on a case-by-case basis. “There’s no law that applies to independent contractors,” said Hilary Page, employment and contract lawyer for SpringLaw in Toronto.

Those precedents are headed for a workout with Uber Technologies Inc. and other companies, as the rise of the gig economy further blurs the line between worker and contractor, between side hustle and job.

Uber is already caught up in litigation, with the Supreme Court of Canada hearing a matter in November related to a proposed class-action suit seeking to classify the company’s drivers as employees rather than contractors.

In that case, Uber has contended that its drivers are contractors subject to the arbitration process outlined in its standard contracts; the driver suing Uber is arguing that the drivers are employees, and protected by employment legislation.

And on Tuesday, the Ontario Labour Relations Board ruled that workers for Foodora Inc. are dependent contractors (a classification that gives some of the benefits and protections of an employee) and therefore able to unionize, rejecting the company’s contention that its delivery workforce are independent contractors.

As Mr. Silber discovered, being on the wrong side of that line can be extremely costly for a company. He is appealing the tax court decision that backed the CRA and says paying the tab for those years of EI and CPP contributions would leave AE Hospitality insolvent. “The company can’t pay that.”

At first glance, AE Hospitality is not even a pixel in the digital world of the gig economy. Mr. Silber has been in the catering business for more than four decades, and though AE Hospitality uses software to match workers to catering events, the company’s technological pedigree falls well short of that of Uber and its peers.

But the May tax court decision makes clear that AE Hospitality has quite a bit in common with the economic precepts of the gig economy: a lean centralized operation that depends on a fluid group of workers, who are asked to sign agreements that they are contractors, freeing the company from the obligations of an employer. In Mr. Silber’s view, many of the people he paid were simply earning some cash to supplement their other endeavours – a side hustle, in the gig economy. “These are artists, entertainers, actors,” he said.

Workers gain some tax benefits from contractor status, but they don’t enjoy the protections and privileges of employees, such as overtime. And, if they aren’t making their own contributions to EI or CPP, they will limit their access to those programs.

In determining whether a worker is an employee or a contractor, a court will examine a number of factors, including the intention of the two parties, the degree of control exercised over a worker, whether the worker used their own tools and whether the worker had the chance for profit or the risk of a loss.

In her decision, Justice Johanne D’Auray agreed that, for all but two people, the wait staff had intended to be treated as contractors, not employees.

But she ultimately accepted the CRA’s position that the workers – paid on an hourly basis – had no promise of profit or worry of loss. And, Justice D’Auray ruled that AE Hospitality did exercise control over its workers, since supervisors provided instruction on table settings and food presentation, among other matters.

For the time period at issue in the court case, AE Hospitality provided workers to two catering companies, both with ties to Mr. Silber. The first, Applause Catering Inc., is owned in part by Mr. Silber’s son. Mr. Silber, through a holding company, holds a 25-per-cent stake and is also an officer and director. The other catering company, operating as Encore Food with Elegance, is owned by Mr. Silber’s wife; he is also an officer and director of that enterprise.

Bobby Solhi, partner in tax law at Borden Ladner Gervais LLP in Toronto, said courts have historically placed the most emphasis on the factors of intention and control. In his view, gig economy companies have a good case to make that their workers are independent contractors. In addition to signed agreements to that effect, companies such as Uber can point to a decentralized system that allows drivers to choose their own hours and decide which fares to pick up. But he warns that the more a company seeks to exert control, the greater the risk it runs of finding itself in Mr. Silber’s situation. “At some point, you’re veering toward an employee,” he said.

The CRA declined a request for an interview, saying it cannot comment on matters being heard by a court. But in a statement, the agency noted that either employees or employers can ask it for a ruling on whether a worker is a contractor.

Control is typically articulated as human supervision. But Alex Rosenblat, senior researcher at the Data & Society Research Institute, a non-profit organization in New York, and author of Uberland: How Algorithms Are Rewriting the Rules of Work, contends that the software used in the gig economy is a new type of managerial control. Instead of a human supervisor (and, in the case of AE Hospitality, pictures of proper food presentation), companies have created algorithms that nudge workers in the desired direction.

Ms. Rosenblat says those bits of computer code are tools that management uses to exert control, just as surely if a human being were doing the nudging in person. “Algorithm is just another word for how you make decisions,” she said.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.