Author: Daniel A. Lublin
Owning a business within a business is not dispositive
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 when employees, 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 really matters is how the parties behave.
When will a court find that a contractor is actually an employee?
Despite signing an independent contractor agreement and incorporating his own company, the Ontario Court of Appeal concluded that Gordon Braiden was an employee. Braiden, a sales agent, worked full time and exclusively for La-Z-Boy, which controlled which products he sold, how he sold them, where his sales territory was and what promotional methods to use. It did not matter that Braiden had incorporated his own company, according to the court, because ultimately he was part of La-Z-Boy’s business, not his own business.
Just recently, the Court of Appeal also found that real estate agent Elizabeth McKee was an employee even though she had signed a contract, had her own incorporated business and invoiced her principal for commissions. Without her principal’s involvement, McKee hired, trained, and managed her own subagents who worked for her in selling her employer’s homes.
Following a fallout which cost her job, McKee sued arguing that she was employee. The fact that McKee operated a business within her work for the company did not mean she was a contractor, nor did the fact that she hired and supervised her own staff. Since she worked for 18 consecutive years exclusively for her employer and had become an integral part of its business, the court declined to uphold the contract and characterized her as an employee. She was then awarded nearly half a million dollars in severance.
Labeling a worker as a contractor is not dispositive, even if the worker agrees. Courts will always consider the true nature of the relationship to determine how the parties actually behaved.
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 he or she performs the job. Even an airtight independent contractor agreement will not be reliable unless the parties stick to what it says.