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In a recent decision(1) the Ontario Court of Appeal confirmed that years spent as a dependent contractor may count when calculating notice of termination for a contractor turned employee who is terminated without cause.
In 1994 the individual was hired by the company as a freelance wardrobe stylist with no written agreement.
Over the next 10 years the stylist predominantly worked nearly full-time and exclusively for the company. During slow periods, the stylist occasionally worked fewer hours and sometimes worked for others. The stylist invoiced the company for her services weekly. The company did not consider her to be its employee or agent; it considered her an independent contractor operating a sole proprietorship type of business. The company paid her invoices without withholding any amounts, including for taxes or premiums for the Canada Pension Plan or employment insurance.
In 2004 the stylist was hired as an employee under a written contract. The contract said that 2004 would be the stylist's start date for calculating years of service. The contract also contained a termination provision that specified what she would receive if terminated.
The stylist was terminated without cause 13 years later. She was given pay in lieu of notice, which was calculated based on her 13 years as an employee. The stylist sued, arguing that she was entitled to notice calculated based on her nearly 23-year working relationship.
The judge decided the case without a full trial in a legal process called 'summary judgment'.
The judge held that the stylist had been a dependent contractor for the first 10 years of the relationship – from 1994 to 2004 when she became an employee. This was significant because like employees, 'dependent contractors' (ie, contractors who are economically dependent on their principal) are presumed to be entitled to reasonable notice of termination without cause. The judge said that even if the stylist had been an independent contractor, it would have been "wrong in principle to ignore these years" of the relationship when determining the reasonable notice period. The judge awarded the stylist 21 months' pay in lieu of notice because he concluded that the termination provision in her contract was unenforceable. The appeal court upheld the judge's decision.
Employers should be aware that prior consecutive service as a dependent contractor will likely count when calculating notice of termination if that contractor becomes an employee. This decision also leaves open the possible argument that prior service as an independent contractor may be included in length of service when calculating notice of termination. To manage both risks, employers should ensure that individuals switching from contractor to employee sign a written employment agreement with an enforceable termination provision that limits their termination entitlements.
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