Classification of Employees VS. Independent or Dependent Contractors
WHAT COURTS SAY ABOUT CLASSIFICATION
The classification of agents as employees, independent or dependent contractors has always been a thorny issue in employment law. The distinction between the classifications is often unclear because it is case specific. Recognizing that a true independent contractor relationship can be beneficial for both parties, this article will analyze recent cases where the enforceability of independent contractor agreements is at issue and will also highlight key strategies for successfully structuring relationships.
The natural starting point for this discussion is McKee v. Reid’s Heritage Homes Limited, 2009 ONCA 916 [“McKee”], where the Ontario Court of Appeal clearly recognized three categories of workers: employee, independent contractor and the intermediate category of dependent contractor. In this case, McKee worked through her own incorporated business and also hired, managed and trained a team of agents to sell homes. The Court held that McKee was actually an employee. The factors the Court considered were that she worked exclusively for the company, her work relationship was under the control of the company, the company provided the homes that she sold, she had no expectation of earning a profit other than the fixed commission agreed upon and her sales team was a crucial element in the business organization.
In its reasoning in McKee, the Court provided more general guidance on the topic of dependent contractors. The Court stated that the dependent contractor category is a subgroup of the independent contractor category. It does not affect the range of the employment category. Accordingly, the first step is to determine if the worker is an employee or contractor. Only if the worker is determined to be contractor is it necessary to move to the second step, to determine whether the worker is independent or dependent contractor. The critical factor at this stage is exclusivity of the contractor.
The two-part McKee test was subsequently adopted in Richards v. Rainy River Cattlemen’s Assn.,  O.J. No. 5786 [“Richards”]. In this case, Richards worked as the defendant’s sales barn manager under an oral agreement from 1997 to 2004, at which time the parties entered into a fixed term contract for six years. Richards was responsible for organizing several cattle auctions each year. In 2007, the defendant terminated Richards’ employment. Richards sought compensation for the remainder of the term of the contract. The Court held that Richards was a contractor and then moved on to determine whether he was independent or dependent. The Court held that given the fact that Richards had a permanent relationship with the defendant, he was fully economically dependent on the defendant, and he was accountable to the defendant’s Board of Directors, he was a dependent contractor. The action was dismissed on the basis that the defendant had cause to terminate Richards’ employment. Richards had repudiated the contract due to his refusal to work with a new president.
The important thing to note about Richards is that although the contract did not expressly prohibit Richards from working at other businesses, the defendant had the only cattle auction in the area. Accordingly, permitting Richards to work elsewhere was of little consequence. It did not eliminate or reduce the exclusivity of the relationship. Practically speaking, there was nowhere else for him to work.
The two-part test in McKee was also adopted in Sarnelli v. Effort Trust Co., 2011 ONSC 1080 [“Sarnelli”]. Sarnelli operated a locksmith business. Approximately two-thirds of his sales over three years were from the defendant company. The defendant terminated Sarnelli’s services. The Court held that Sarnelli was a dependent contractor and entitled to reasonable notice upon termination. The Court considered the fact that Sarnelli was available to the defendant anytime of the day or night, he relied on the defendant for the majority of his sales, the defendant relied on him as the exclusive supplier of certain locks used in its buildings, the defendant did not have any complaints about him and the defendant relied on him as its primary locksmith.
The important thing to note from Sarnelli is that approximately one-third of his business was attributed to sources other than the defendant. Nevertheless, the Court still held there was exclusivity in the relationship and it would take Sarnelli time to be able to replace the income lost as a result of the termination of his contract.
In light of the broad approach taken by the courts in defining the scope of dependent contractor, it is increasingly difficult to successfully structure an independent contractor relationship. The following are some tips to keep in mind in drafting a written agreement:
1. Avoid standard form contracts.
2. State that it is both parties’ intention that the agent provide services as an independent contractor and not an employee. Expressly renounce the employer/employee relationship. Do not refer to the agent as an employee in the body of the contract.
3. Give the agent as much control as possible over the manner in which they provide services (i.e. avoid supervising the agent in the same manner as other employees).
4. Ensure that the agent is responsible for providing their own tools.
5. Negotiate the agent’s rate of pay. The agent should invoice for services. Avoid including company and employee benefits as part of the remuneration package.
6. Limit exclusivity, reliance and permanence where possible. Ideally, the agent should not be devoting all of their time to the company indefinitely.
7. Ensure the contract is for a fixed period of time.
8. Include a specific notice period for the termination of the relationship.
9. Ensure that the agent is responsible for all tax reporting and withholding obligations.
10. Include an indemnification clause whereby the agent indemnifies the company for any liability arising from any breach of its lawful obligations.
11. Expressly state that the commitments are reasonable and freely given.
Malcolm MacKillop and Meighan Ferris-Miles practise employment law with the firm Shields O’Donnell MacKillop LLP of Toronto.
NOTE: Malcolm MacKillop will be keynote speaker on
Today's Critical Issues in Employment Law
at IPM's Toronto One Day Conference on May 8, 2013. Click here for more details
Ageism in Today’s Workplace
A GROWING EPIDEMIC
Many older workers and their advocates have welcomed the growing trend in Canada to remove restrictions on older workers remaining in the workforce after age 65 if they have the health, capacity and stamina to do so. A series of successful challenges to mandatory retirement policies in both government and the private sector have also removed some of the barriers to extending one’s working life. But there are some troublesome signs on the horizon that not all employers are welcoming these changes and some are actively opposing this practice.
This comes at a time when Canada is facing a worker shortfall of between two and three million employees in the next ten years. Still, many older workers claim that they are being pushed out prematurely in favour of younger workers. This seems to be particularly true in legal and accounting firms, many of which still have formal retirement age for partners ranging between 60 and 65. Some lawyers are reporting that they being asked to leave even though they are still high performers within their organizations. Are these individuals being discriminated against and are they the first victims in a growing wave of ageism in today’s workplace?
Philip H. Gennis,|
msi Spergel Inc
The companies in question deny that they have official policies to force older employees out, but that may be because of human rights laws at both the provincial and federal level which prohibit discrimination based on age. For now, the evidence is anecdotal. Experts believe that there will soon be lawsuits and cases that work themselves up through the system that challenge these practices and call for tighter monitoring and stronger enforcement of existing human rights protection for older workers.
In the United States, by way of example, there have already been successful challenges to what some have perceived as ageist actions by corporations. There has also been considerable research about how older workers have been treated. A study by Boston College’s Sloan Center on Aging & Work found that there is a general workplace bias against older employees and that even employees in the their late 50’s are intentionally or unintentionally passed over for promotions because of their age. The report also suggests that age discrimination increases when there is a tight economy and workers of all ages are pitted against each other when it comes to finding or hanging onto jobs.
In the United States and Canada, there have also been cases where employers use performance management and discipline to move older workers out the door. This is legal, even under human rights legislation, as long as employers apply the same definitions and procedures to all workers. Also, and this is a big caveat, if they are willing to offer older employees other assignments or accommodations if their performance decrease is directly related to aging. The fact is that once these discussions start taking place, the reaction of many older workers is not to fight to stay but to leave, sometimes with increased severance and sometimes without.
It is hard to pinpoint exactly why some forms of ageism seem to be growing in today’s workplace. Some analysts suggest that there has always been tension between younger and older workers and employers have always tried to maximize their resources. Both have led to the perception that many older workers have that they are being pushed out prematurely. There may be some short term cost benefits to “refreshing” the workplace, but smart employers have always recognized that a mix of older, experienced workers along with new blood seems to work best.
This allows the older workers to train and mentor the newer recruits. The organization benefits in the long term by having a positive transfer of both corporate knowledge and good customer and client relationships. Older workers don’t just know what worked well in the past but even more importantly they know what didn’t. They can help organizations and the next generation of workers avoid the same mistakes.
There is much that younger workers can learn from those with gray hair. Philip Gennis, commercial insolvency & restructuring specialist with msi Spergel Inc., states that there is also a much greater level of sales continuity where older workers are able to effectively mentor younger ones without the cloud of forced retirement hanging over their heads. This is especially significant in the professional services industries where relationships with clients are far more important than sales targets and projections. It is naive to suggest that these relationships are easily transitioned. Clients are loyal to those they trust, not firms or “branddriven” initiatives.
As more and more older workers remain in the workplace, organizations will have to deal with all of these financial, legal, human rights and business considerations. Getting rid of older workers is certainly one option to consider. But is throwing the old baby out with the bath water really the best one? Ageism may not be as hurtful as racial or sexual discrimination, but it could cost your organization money and energy in both the short and long term.
Members Quarterly Staff Writer
Put Me in Coach!
COACHING FOR PERFORMANCE
Many lessons can be learned from major league baseball on how some of the best coaches in the world get the most out of their teams. John Fogarty had it right: “there’s new grass on the field”. The world is changing at a phenomenal pace and so too are workplaces. Organizations are evolving to meet increasing expectations. We need agility in our corporate cultures as we navigate changing demographics, employee and customer expectations and technology.
What does this mean for employee competency? Organizations are realizing they need fresh thinking when it comes to development which has largely consisted of classroom training. Well-intentioned efforts to train for performance are falling below expectations, both for employees who do not feel well equipped to deliver the service they want to deliver and for employers who question the recurring investment in training that just doesn’t “stick”.
Board of Nova Scotia
The playing field for learning and development has expanded. We’re now in the outfield. The question leaders ask themselves is “How do we enable the playing of a bigger game and create conditions for sustainable employee learning and growth that foster individual accountability for performance?”
It’s a big question. The answer lies in lessons from baseball or any organized sport. It’s about coaching. In baseball, many players attribute a large portion of their success in life and work to the “Little League Days” - lessons learned from great coaches.
These are coaching lessons – not tactical ones. It’s not developing a stronger curve ball, getting your body in front of ground balls or how to lay down the perfect bunt. It’s about how you show up: how to approach the game, the critical thinking required to make the play, individual accountability for performance, team work, perseverance, work ethic and having a positive attitude. It’s about creating that individual capability and organizational capacity to play those key positions in today’s game and for the season. Coaching can have the same impact in organizations.
Imagine the feeling when the player crosses the plate – the sense of victory, pride and contribution to the team’s success. Is that not what we want for and in our employees so that they can impact our customers? Crossing the plate is just like creating capacity in employees to deliver the service that your customers require. These are the home runs that differentiate you as a business. Inspiring employees to be their greatest is how this happens. Coaching acknowledges that inherent capability and desire in each of us. It’s how we enable employees to apply knowledge for sustainable learning. This is what our customers need. That level of performance is what they expect.
The philosophy of coaching in baseball resonates in workplaces today. As leaders, we need to instil a coach approach in our organizations. Like a baseball coach, leaders who coach for performance develop players to have a successful season and can help instil a love of learning “for the game” that can last a lifetime. Exceptionally good coaches in any field can keep players interested in continuing to participate from year to year. We can do the same with our employees. They can believe in what they do, in its capacity to impact the organization’s bottom line and they can foster that ongoing love and desire for continuous improvement.
When leaders and organizations can create this desire and level of engagement in employees (their “players”), the “out of park” magic happens. Employees feel great about their contribution and organizations achieve results. In the eyes of our customers, that’s worth the price of admission.
Carla Hurley is the Director of Human Resources with the Workers’ Compensation Board of Nova Scotia. She can be reached at firstname.lastname@example.org.
NOTE: Carla Hurley will be presenting on the topic
The Next Frontier - Recruiting for the 21st Century Workplace
at the IPM Halifax Spring Conference on April 10, 2013. Click here for more details
Get the Right People on Board
NEW INSIGHTS ON ASSESSMENTS
“Getting the right people on the bus”, to borrow from Jim Collins of Good to Great fame, is arguably one of the most critical challenges facing organizations. The complexities are further complicated by the diversification of our workforces and the globalization of the organizational landscapes in which we conduct business.
At the heart of this quest is the need to identify talent that will be the right “fit” for our organizations. There are many formal and informal ways that these individuals can be identified, including online sites such as Monster or LinkedIn.
Craig Dowden, Ph.D|
Once this potential talent has been found, it raises an even more important question about how to identify which one of the many candidates provides the “best fit” for the organization. Despite the intensity and duration of hiring processes often including panel interviews and/ or exhaustive reference checks, surprisingly few use one of the most rigorous tools at their disposal.
In too many cases, key decision-makers rely on a “gut feeling” to make this all important choice. Although it is tempting to feel we are fully equipped to make this decision, there is considerable evidence to suggest some discretion would be prudent here.
A recent paper statistically combined the findings from 140 separate studies which compared the effectiveness of “clinical” (e.g. professional judgment) versus mechanical (e.g. statistical/actuarial-based) assessment methods for making hiring decisions. The authors concluded that “depending on the specific analysis, mechanical prediction substantially outperformed clinical prediction in 33% to 47% of studies examined.” Perhaps an even more compelling finding was that the superiority of mechanical versus clinical decision-making was consistent, even in cases where the judges were highly experienced. This suggests that experience may not be the best teacher when it comes to making hiring decisions.
Awareness and acceptance of our limitations is only the first step. Trying to identify the best “mechanical” tools for the job may be even more daunting. Conducting a Google search on the topic of assessment delivers an overwhelming number of possibilities. So, how does one decide?
In the world of psychometric assessment, two key differentiators separating effective from ineffective tools are reliability and validity.
One of the most important aspects of reliability relates to the stability of the results. In other words, if a candidate takes the same assessment next week, will their results be consistent? If the answer to this question is “no”, major problems are created from a hiring perspective. An organization needs a tool that will allow them to be confident in their capacity to “know” who they will be getting today, tomorrow and next year. Tools that assess elements of the candidate’s core personality deliver consistent results.
While reliability is important, arguably the most critical feature when using assessment in a business context is validity. A key indicator of validity involves the link between the assessment results and important outcomes including job performance, organizational commitment, etc. If these linkages are not part of the development of the assessment, it may not be linking to things that are of most value to the organization.
One of the industry leaders is the Hogan suite of assessments. On the market for over 30 years, Drs. Robert and Joyce Hogan have researched how our personalities affect organizational effectiveness and have integrated this knowledge into their assessment instruments.
In addition to the Hogan Personality Inventory which assesses an individual’s “normal” personality, they have created other valuable tools such as the Hogan Development Survey (HDS), which outlines potential career “derailers”. It provides unique insight into the behavioural tendencies that can trip us up and provides warning signs for us to be aware of when they arise. From a coaching and integration perspective, these insights may be invaluable to a hiring manager/organization when contemplating important talent selection or succession planning decisions.
Another Hogan tool, the Motives, Values and Preferences Inventory (MVPI), provides another invaluable indicator of “fit”. If these key engagement factors do not overlap, research has shown that this can create numerous challenges for the employee and the organization. Making sure these are in alignment is a key aspect of a good hire.
Although trusting our gut may feel right, it may open ourselves and our organizations to tremendous risk. We may be better served by incorporating more effective and objective tools into our hiring/selection process. Specifically, researching the reliability and validity of proposed assessment tools would be a prudent step in the decision-making process. Although these should not be the only data source that is considered, the “right tools” can add tremendous value. This is crucial since, at present, there are countless tools available in the market that have not undergone rigorous and necessary scientific analysis.
Bringing on a key hire is an essential part of organizational life. Spending a little extra time and money fully evaluating the decision ahead of you is the best way to ensure that your bus will have the right people on it both now and in the future.
Craig Dowden is Managing Director, SPB Organizational Psychology Inc. and can be reached via email at email@example.com.