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Lawrence and Marilyn Keenan began working for Canac Kitchens Ltd. in 1976 and 1983, respectively. The Keenans worked full-time as Canac employees until 1987, when they were called into a meeting and told that they would continue their work for Canac but as contractors, not employees. The Keenans were given written contracts specifying that, although they were no longer employees, they would still devote their full-time and attention to Canac.
Despite transforming the Keenans from long-term employees to perceived contractors, little else changed about their jobs. They were paid the same rates as when they were employed but without the normal payroll deductions for income taxes, employment insurance and CPP. The Keenans also continued to perform the same duties as before and carried business cards bearing Canac's name. In the words of the judge at their recent trial: "To the outside world, and in particular, to Canac's customers, the Keenans were Canac's representatives."
The Keenans' exclusive arrangement with Canac continued until 2007 when they started to perform roughly one-quarter of their work for another employer due to a slowdown in business at Canac. Then, when Canac's business was permanently shut down in 2009, the Keenans were both let go. Since Canac only viewed them as contractors who were working for other companies, it did not provide them with any severance pay even though they both worked for nearly 30 continuous years.
The Keenans sued Canac alleging that, despite their label as contractors, when it came to their severance, they should be viewed as employees. Recently, an appeal court agreed. Focusing on their high level of economic dependency on Canac over the years, the Keenans were characterized by the appeal court as "dependent contractors" – which is a phrase used to describe quasi-employed individuals who must be treated like employees upon termination.
The Keenan case should be another wake-up call to Canadian companies who mistakenly believe that outsourcing work to individuals who are contractors on paper provides immunity from employment standards claims, wrongful dismissal liability and a host of other regulatory matters. This is not so. Even an individual who performs services for various employers can no longer safely be described as a contractor.
The Keenan case is also the latest in a series of judgments demonstrating that when contractor arrangements are challenged, sometimes many years later, courts, labour tribunals and government agencies are usually inclined to find that contractors were truly employees. The arrangement the parties agreed to represents little more than a label. What really matters is how they actually behave. This exposes contractors to unpaid back taxes and employers to severance liability, government audits for taxes, penalties, unremitted employment insurance withholdings and a number of other serious regulatory claims.
If you want to employ or be employed as a contractor, then consider the following advice:
- Ensure a real separation between the employer’s business and the contractor. It is not even enough to permit the contractor to perform services for others. He or she must be given genuine discretion over how and when the job gets done. True contractors are permitted to perform the job in the manner they see fit.
- Always ensure that there is an independent contractor agreement in place that is vetted by an expert. Although a written contract does not establish the true nature of the relationship, a properly drafted agreement will act as a guide for how the parties should behave in order to maintain independence.
- Contractors should incorporate and all payments should flow through to that corporation.
- Contractors must not receive any of the benefits given to regular employees, including health benefits, statutory holidays and overtime pay. Providing them with company business cards, corporate voice-mail, website biographies and invitations to employee holiday parties are common human resource errors.
- Contractors must never continue in the job indefinitely. Courts and government tribunals tend to focus mostly on permanency and dependency in declaring whether a contractor is truly independent. The longer he or she stays, the more likely he or she will be viewed as an employee.
Daniel A. Lublin is a partner at Whtiten & Lublin Employment Lawyers
Special to The Globe and Mail