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“Contractor” Receives Full Termination Pay

By January 29, 2019December 15th, 2021Employment Law

It is quite common within the dental industry for dentists to hire contractors for the practice.  Associate dentists, hygienists… even sometimes receptionists and assistants.

As any good employment lawyer will tell you, only employees and dependent contractors receive termination notice.

Independent contractors, on the other hand, are not automatically entitled under the law to termination pay or notice or severance.

But in a recent case just released in Ontario, this may have just changed! And importantly, an employee who was previously an “independent contractor” who was later turned into an employee received their full legal entitlement to termination pay for their entire duration of employment.

This is a case that all dentist in Ontario need to read – so that they understand what Ontario courts think about independent contractors and termination.

The Case

A recent decision of the Ontario Superior Court looked at how to calculate termination pay for an employee who was previously an independent contractor. In the case named Cormier v. 1772887 Ontario Limited c.o.b. as St. Joseph Communications, the employer (St. Joseph Communications) argued that the Employee was an independent contractor for a decade before she was an employee, and thus her termination entitlements should be based on her “employee” time only. The Employee said she was an employee all along and should get full termination pay for all of her years of service.

The Court fully agreed with the Employee and said her termination pay should be calculated from the beginning of her engagement with the Employer to the end… contractor, employee and all.

The Facts

From 1994 to 2004, the Employer engaged the Employee as a freelance or independent contractor for the business as a wardrobe specialist.  It is important to note the reasons why the Employer thought the Employee was independent (does this person sound independent to you?):

  • The Employer purchased the clothing and hired the models for the Employee
  • The Employer supplied the Employee with the tools to do the job
  • The assignments came from the Employer directly
  • The Employer paid the Employee hourly.
  • The Employee’s work was essentially arranged on the day of work, not booked ahead
  • The Employee invoiced the Employer on a weekly basis
  • The Employer did not withhold any amounts for taxes, CPP or EI
  • The Employer did not make any payments for benefits
  • Except for slow periods, the Employee worked approximately 40 hours per week only for the Employer

In 2004, the Employer decided to continue hiring the Employee as an actual employee (not a contractor) under a new written employment contract.

In 2012, the Employee was promoted to a manager position under a new contract which contained the following termination clause:

(a) The Company may terminate your employment at its sole discretion, at any time for any reason, without cause, upon providing you the minimum notice, pay in lieu of notice and/or severance pay required by the Ontario Employment Standards Act, 2000, as amended from time to time. You will have no other entitlement to notice of termination, pay in lieu of such notice, and/or severance pay.

(b) In addition to the foregoing and subject to the consent of the Company’s insurers, you will be entitled to continue to receive Company benefits (excluding STD and LTD benefits) during the notice period specified above.

In 2017, the Employee was terminated under the above clause.  The Employer calculated that her employment began in 2004 when she became an official employee (not in 1994 when she first started) and thus she was called a 13-year employee (and received termination pay under the above termination clause).

The Decision

As I said earlier, the Court agreed with the Employee and said that all of her years of service should be counted for termination pay, since the worker was a dependent contractor from 1994 to 2006, and an employee for the remainder – and she essentially had the one employer for her entire tenure. For a 23 year employee, a 21 month notice period is within the range of what is reasonable.

The Court also examined the above termination clause and found that the contract was also deficient because it did not comply with the minimum standards under the Employment Standards Act; the 2012 contract provided only SOME of the benefits of employment but not ALL of benefits of employment (it excluded STD and LTD benefits). For that reason, the contract was trying to give less than what the ESA would have given the employee and the termination clause was voided.

But interestingly, the Court actually took the time to consider how to calculate the Employee’s termination pay had it found she was an independent contractor from 1994-2004. In a shocking decision, the Court stated that it would have awarded the Employee the same termination pay even if it had found her to be an independent contractor and not a dependent contractor, at paragraph 73:

… in my opinion, even if I had concluded that [the Employee] was an independent contractor from 1994 to 2004, it would have been wrong in principle to ignore these years of their relationship in determining the reasonable notice period. The court should take all of the circumstances into account and in the immediate case even if I had found [the Employee] to be an independent contractor, I would not have ignored those years of their relationship. In either case, considering all of the relevant factors and the particular facts of this case, I conclude that the reasonable notice period for [the Employee] at the time of her dismissal is twenty-one months (emphasis added)

To confirm, one Judge of Ontario’s Superior Court of Justice just said that independent contractors are entitled to notice of termination because the Court should look at all of the circumstances of the working relationship.  There was no case that Justice Perell pointed to as support for his legal obiter dicta (meaning “by the way” or “said in passing”) that an independent contractor can receive notice of termination where the circumstances permit it.  The Judge did not say which circumstances were more convincing or less convincing to his decision.  He decided that this one particular independent contractor/employee would have been entitled to lots of termination pay because he felt the circumstances of the relationship called for it.

Discussion

This case has massive implications for employers in Ontario.  It shows that employers need to know that if they transition someone who they thought was an independent contractors into a genuine “employee”, that time they spent as an independent contractor may be calculated in establishing their right to termination pay.  This is a change to the previously-settled law that independent contractors are excluded from notice of termination, and only employees and dependent contractors are entitled to notice. Unless this case is appealed, the Judge’s remarks could send ripples through the employment litigation world.

If there was ever a time to revisit employment contracts or renew contractor agreements, now is the time!

This case also shows that having clear contractor agreements and employment agreements can clear up any confusion in an employment agreement and avoid huge payouts down the line.  So, where there is a significant change in a worker’s relationship with the employer (raise, promotion, transition to written contract for example), that opportunity can be used to clarify the existing contract and ensure the business is protected down the line – with the right contractual language.

DMC