Author: Daniel A. Lublin
Customs used to define Canadian employment law – not contracts. When there was a workplace dispute, judges would decide cases based on what was reasonable or just or what the parties would have agreed to if they had thought about the issue from the outset. Customs, however, have been replaced by comprehensive employment contracts and lawsuits for wrongful dismissal. Now, instead of being asked to consider what’s most reasonable or fair, judges are asked whether a contract applies and, if so, what its terms represent. But what happens when a contract doesn’t accurately portray the true nature of an employee’s job? As Centra Windows Ltd. recently learned, sometimes workers are not bound by the agreements they have agreed to.
Having sold home insulation part time for a number of years, a more permanent relationship made sense to Syndey Smith. So, when an opportunity arose to work full time for his friend, the owner of Centra Windows Ltd., Smith did not hesitate to take on the job.
Centra had Smith agree to a contract that confirmed he was a commissioned salesperson and offering him a specific territory for sales. The contract mandated that Smith would work exclusively for Centra and required him to hire his own lead generators to develop sales.
Later on, when Centra stopped paying Workers Compensation assessments for Smith, it required him to incorporate a separate business to provide his services in order to reduce Workers Compensation premiums.
Over the years, Smith’s duties increased in scope and importance. He was invited to participate in the employee share ownership plan, and was eventually appointed to the position of vice president of marketing and development. When Centra needed financing for a project, Smith, part of an “inner circle” of company executives, loaned the company funds.
In 2004, Centra felt that Smith’s performance was far below expectations and it gave him a letter stating that his commission payments would be terminated if his performance did not improve. Shortly after, Smith was terminated without an offer of severance because Centra felt that Smith was a contractor, not an employee.
However, after 14 years of service, Smith believed he was entitled to much more. He then challenged Centra’s views in court – and recently he won.
Although Smith was not paid a salary and he incorporated his own company to invoice Centra for services, he was truly an employee, ruled the court. The true test is not what the parties call themselves in a contract, but rather how they actually behaved. In this case, Smith worked exclusively for Centra, was perceived as integral member of the organization, and he was given an ownership stake in the company through its stock purchase plan. Therefore, despite the lack of an “employee” label, the court concluded this relationship existed anyway.
Having a worker incorporate a business or labelling him or her as a contractor is never dispositive. 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 to perform the job. Even an airtight independent contractor agreement will not suffice unless the parties stick to what it says.