Owning a business within a business is not dispositive

Date: 2010
Author: Daniel A. Lublin
Publication: Metro
It’s workplace law’s newest phenomenon: employers, happy to unburden themselves from the various costs and liabilities associated with their employees, increasingly retaining “contractors” to perform the same services their employees did before. Often their former employees are transformed into contractors and these “contractors”, content to pay less taxes than they did before, are not about to complain. However, this arrangement is often a fraud.
When these arrangements are challenged, sometimes many years later, courts are apt to find that the contractors were truly employees. No surprise there. The arrangement represented little else than a “label”. Seldom will a label be sufficient. What actually matters is how the parties behaved.
When is a contractor actually an employee?
Despite signing an agreement stating that he was a contractor, sales agent Jose Santos was actually an employee. Over 20 year period, Santos worked for a variety of different employers, selling vacuum cleaners and accessories manufactured by HMI industries Inc. When he eventually signed a contract with HMI directly, he was required to follow its policies and procedures, as well, as report to a Director of Sales.
Since contractors are not generally entitled to severance, when HMI ended the relationship, Santos sued for wrongful dismissal, claiming that he was actually their employee. Recently, the Quebec Court of Appeal heard his case and it agreed. The Court stated that it was not bound by what the parties called themselves but rather, how they behaved. Here, Santos was closely supervised by HMI and was under its control and direction. Although he had some independence in how he performed his job, it was not enough freedom to characterize him as truly independent from HMI.
Employers and employees continue to get this wrong. If you want to employ or be employed as a contractor, then do as follows:
Ensure that there is a clear separation between the employer’s business and the contractor. Permit the contractor to perform services for others and to maintain genuine discretion over how and when the job is performed. Even an airtight independent contractor agreement will not be reliable unless the parties stick to what it says.