Working with the “Dependent” Independent Contractor

contractor

In some circumstances, the line between an independent contractor and an employee can become blurred. As we described in a previous post, in assessing whether a worker is a contractor or actually an employee, we will need to analyse a variety of factors, including the control the employer has over the worker’s activities, whether the worker provides his or her own equipment, the degree of financial risk taken by the worker and whether the worker is able to hire helpers.

As is to be expected, the independent contractor normally has significant control and autonomy over its actions. However, circumstances do exist, often in the case of the “owner/operator” contractor, where all of the classic characteristics of a contract relationship are present, but the arrangement with the client is nonetheless characterized by dependence and vulnerability. Consider the following fictional example:

John owns a small excavator, and years ago he incorporated John’s Excavation Services Ltd. where he contracted out his services, largely in the construction industry. 10 years ago, John was approached by a prominent local residential construction company that was looking for help in excavating foundations. This was a promising opportunity for John, as it offered long-term, stable work in his home community.

excavatorIn short time, John was working almost exclusively for the construction firm, moving his excavator from site to site digging foundations. He maintained his equipment and paid for all expenditures associated with its operation. John also personally provided all of the man-power. Every month he would invoice the construction firm and would be paid for his services.

Recently, the construction firm underwent a change in management, and it was determined that it would be cheaper for the firm to perform its own excavation work. From one week to the next, they stopped assigning work to John.

In considering this example, John’s Excavation Services Ltd. presents many of the same traits as a classic contractor: John owned his own equipment, had the option (presumably) of hiring helpers, was responsible for maintaining, insuring and operating his excavator, would invoice for his services, and presumably had autonomy over how he would perform his work. He was also in control over his operations, and in theory could refuse jobs, although this would likely not be in the best interests of his operations.

In reality, however, John’s Excavation Services Ltd. is not a typical contractor for two main reasons: John had one client, and John worked with this client for over a decade.

Since the Great Depression, Canadian courts have recognized the status of the “intermediate” or “dependent” contractor for situations such as John’s where there is clearly not an employment relationship, but where there is also a relationship of economic dependency. As in John’s case, this dependency is usually created through exclusive or near-exclusive use of services (John had one client) and through an established, generally lengthy relationship.

In situations like John’s, we recognize that some self-employed workers, although technically contractors, are nevertheless in a position of vulnerability vis-à-vis their client. Much like an employee, there are likely high levels of economic dependency and even subordination. From a public policy perspective, it would not be fair to end John’s contracting relationship without a heads-up.

This creates the primary distinction between the independent contractor and the dependent contractor: much like an employee, the dependent contractor is entitled to reasonable notice of termination. Reasonable notice can either be provided through a working notice, where the worker is provided with notice that his or her employment will be coming to an end and is expected to work up until that date, or through pay in lieu of notice, where the employer relieves the worker of his or her duties and pays out the notice period.

In assessing what is appropriate reasonable notice, a court will consider how much time would reasonably be needed for the contractor to replace the income lost by the wrongful termination, considering factors such as the contractor’s age, experience and demand for his or her services. Unfortunately, there is no formula for determining what is reasonable notice of termination, but in many cases compensation for terminating the contract can be equal to several months’ of accounts for services.

David M. Brown,
Doak Shirreff LLP
dbrown@doakshirreff.com
 
The merits of any potential claim are always fact dependent.  Readers should not take legal action, or should not refrain from taking legal action, in reliance on the information contained in this blog and without first obtaining advice from legal counsel in their home jurisdiction.
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Filed under Employment Contract, Independent Contractor

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