'The more you control, the more it’s actually your employee - that's the meaning of an employee relationship'
A worker with 12 years of service wasn’t an independent contractor and is entitled to 18 months’ worth of commissions for wrongful dismissal, the Ontario Superior Court of Justice has ruled.
The worker was the exclusive sales agent in Ontario for Presentoirs CLIC, a Montreal-based company providing point-of-purchase solutions and in-store marketing materials, since 2002. They drafted a written contract identifying the worker as an employee and containing a non-competition agreement, but it hadn’t been finalized because the business and their relationship was constantly evolving. The worker considered himself bound by the contract, although Presentoirs considered him an independent contractor when he was hired.
The business was successful and the worker earned larger commissions over time. He was given the title of vice-president of marketing with company business cards and, in early 2014, the worker closed a deal with a significant new client that played a large part in Presentoirs’ success.
In February 2024, Presentoirs made an assignment in bankruptcy and the business was taken over by Innovation CLIC, which was incorporated by Presentoirs’ owner. Innovation retained the worker in the same capacity and continued Presentoirs’ business, including serving its existing clients.
On April 29, Innovation informed the worker that his commission structure would be reduced and his contract would terminate effective Dec. 31. His commission would change from 10 per cent on all sales to 10 per cent on the first $300,000 in sales, with a declining percentage for higher amounts including 1.5 per cent on sales of $1 million or more.
Termination of employment
The worker refused to accept the changes, but he continued to work for Innovation until August, when the owner instructed him to cease all client contact. Since the worker was unable to perform his duties, he considered his employment to be terminated immediately. However, Innovation hadn’t paid his commissions since February when it took over the business.
The worker sued for wrongful dismissal and his unpaid wages from February to August 2014.
The court considered whether the worker was an employee, a dependent contractor, or an independent contractor. Based on factors such as economic dependency – the worker didn’t have any other clients and worked full-time hours - exclusivity of work, and the degree of control exercised by the two companies – they required the worker to attend its premises every day with his own office and he used company resources - the court determined that the worker was either an employee or a dependent contractor. The court also noted that the fact that the companies paid the worker through his corporation didn’t change the substance of the relationship, as the corporation’s role appeared to be to receive payment and nothing else.
“For any company looking to hire a worker and have them deemed to be an independent contractor, it's the substance of the relationship that matters,” says Shannon Sproule, an employment lawyer at Turnpenney Milne in Toronto. “This was deemed to be indefinite because it was 12 years long and all the factors were at play - there was control of the clients and the work, which is key for establishing that it’s an employment or dependent contractor relationship.”
“The more you control, the more it’s actually your employee - that's the meaning of an employee relationship,” she adds. “An independent contractor should theoretically be able to do other work, but in this case, the worker didn't have any other clients - how could he have other clients when he's working full time?”
Reasonable notice
The court also concluded that the worker’s years of service with Presentoirs should be combined with his time at Innovation when calculating reasonable notice, as there was an implied continuation of his employment agreement – the worker wasn’t offered any reasonable notice or compensation from Presentoirs, Innovation didn’t seek to terminate him, and both companies had the same owner.
Innovation should have taken steps to ensure that its intentions with the worker were clear at the time it took over from Presentoirs, says Sproule.
“The time of the acquisition is really when you should be clear about whether you're taking the employee or contractor on and there needs to be a new contract in place, or you need to alter the terms of the employment,” she says. “In this case, they waited months to try to do that, and the court determined that that's too long - you need to do it at the outset, when the change in ownership is actually happening.”
The court found the contractual commission structure to be 10 per cent on all sales, consistent with the worker’s work history, and Innovation implicitly agreed to those terms when it continued his employment without seeking new terms.
Applying the Bardal factors, the court determined that an 18-month notice period was reasonable, given the worker’s age - 67 at the time of termination – 12 years of service, the character of his employment as vice-president of sales who was “instrumental in building this business,” and the limited availability of comparable employment in his specialized field. The court calculated that the worker was entitled to $97,736.52 in commissions for the notice period, subtracting $16,289.43 already awarded for partial notice provided by Innovation. In addition, the worker was owed $79,745 for the period he continued to work and wasn’t paid, said the court.
Limited mitigation ability
A key factor in the relatively lengthy notice period was the worker’s limited ability to mitigate his losses from termination due to his age and the character of his employment in a niche industry, along with the fact that he didn’t plan to retire, says Sproule.
“If you're an employer and you're looking at the risk involved in terminating an employee, if they’re at an age and have a character of employment that would make it very hard for them to mitigate, then it's likely that you could be on the hook for a longer notice period because they simply can't find comparable employment,” she says.
The court declined to award future commissions beyond the notice period, as there was insufficient evidence to support a claim for potential earnings from contracts the worker secured before his termination.
In total, Innovation was ordered to pay the worker $161,192.30 plus costs of $27,120.72.
“There's no hard rule on the magic number in terms of when a contractor becomes an employee, but I would say once you get into 12 years of service, the likelihood that this person would actually be deemed to be an independent contractor is quite low,” says Sproule. “You're really heading more into employee territory when you've kept someone on your payroll and working for you for several years.”
“If the company wishes to actually enter an into an employment relationship, a new contract should be in place to reflect that, with all the key terms in place including termination provisions to ensure that what's agreed upon is signed at the outset of the relationship,” she adds. “A contract that's in place can theoretically prevent an employee from being able to claim common law notice when the employment terminates.”
And if an employer wants to maintain an independent contractor relationship, it should ensure that senior management is properly trained on what they can and can’t do, says Sproule.
“If a company wishes to hire an independent contractor, then best practices include ensuring that even when you do have the proper contract in place, you're also informing your senior management about how their actions need to align with what's intended for that working relationship,” she says.
