The Dependent Contractor

In the case of McKee v. Reid Heritage Homes,1 the Court of Appeal has now confirmed the intermediate category of the dependent contractor. As a result, employers must now provide reasonable notice upon termination for both employees and dependent contractors. Employers, in order to be aware of the defining features between an employee, an independent contractor, and the new intermediary category of the dependent contractor, need to take a closer look at the essence of the relationships with workers.

McKee v. Reid Heritage Homes

In 1987, Reid Heritage Homes, a new home builder, entered into a handwritten contract with Elizabeth McKee agreeing that McKee would sell 69 homes for Reid, exclusively and in exchange for commission. The agreement included a termination provision providing that with 30 days’ notice, either party could end the agreement.

In the years following, and after the initial 69 homes were sold, McKee continued to sell homes for Reid, being paid commission through her incorporated business. McKee hired and trained her own contingent of sales staff to assist with her work. McKee paid these staff through the commission she obtained from Reid.

Beginning in 2000, under new management, the company underwent restructuring that affected the way McKee was to operate within the company. Consequently, the relationship between McKee and management deteriorated. Ultimately, McKee sued for wrongful dismissal.

The trial judge found that McKee was clearly an employee of Reid Heritage Homes. After considering her age, years of service, position, qualifications and likelihood of finding comparable employment, the court awarded her 18 months’ severance pay in lieu of notice.

The Court of Appeal upheld the trial court’s finding that McKee was an employee of the company as determined by the trial judge. The court also confirmed the intermediary "dependent contractor" status, outlining what it entails.

Defining the Worker as an Employee, Independent or Dependent Contractor

Employers should be aware that the dependent contractor falls under the contractor category. Courts will first determine whether a worker is an employee or a contractor in the normal way, answering questions such as:

  • Who supplies the equipment?
  • What degree of control does the employer impose over the work?
  • How is the worker paid?
  • Does the worker hire and direct workers?

If the worker is found to be a contractor, the next stage begins to determine whether that contractor is independent or dependent. The sole factor in this determination is exclusivity — whether the employer is the only source of income for the contractor. Exclusivity inherently implies that the contractor is economically dependent on the employer, and is entitled to reasonable notice upon termination, just like an employee.

At the first stage, when the courts are determining whether someone is a contractor or an employee, exclusivity is but one factor that is considered. However, once it has been determined that the worker is a contractor, exclusivity becomes the sole and defining factor. Employers, resting on the laurels that they are in a contractor relationship, may be surprised to find that they are responsible for providing reasonable notice to contractors found to be in this intermediary position — not quite a contractor, not quite an employee.

Tips for Employers

Employers are advised to consider the essence of their relationship with their workers, particularly contractors, given that dependent contractors are now entitled to reasonable notice of termination, just like employees.

To manage this obligation, employers can take steps to ensure they are engaging in best practices by reviewing current relationships with workers and taking steps when entering into new relationships. Employers should be aware of the following:

  1. Are your contractors working exclusively for you? Where your contractor is economically vulnerable by virtue of their exclusivity, employers will be responsible for providing reasonable notice.
  2. Are contractors performing an essential function of your business? If so, they are more likely to be seen as employees.
  3. Are workers operating under a valid contract? Employers should ensure that they are working under valid contracts with clearly defined provisions.
  4. What termination provisions, if any, are contracted? Contract should have termination provisions that at least match, if not exceed, the legislated standards.

If you wish to discuss the implications of this case to your workplace, please call any of the lawyers in our Labour and Employment Group.

1 McKee v. Reid’s Heritage Homes Ltd., 2009 ON C.A. 906.