26 Months’ Notice Awarded to Dependent Contractors

by & Christina Catenacci

In Keenan v Canac Kitchens, the Ontario Superior Court of Justice concluded that two workers were owed termination notice by their employer because they were not independent contractors as the employer tried to argue, but rather dependent contractors as the evidence showed. Therefore, the employer did owe them termination notice.

Facts of the case

Lawrence Keenan began working with Canac Kitchens Ltd. in 1976. For the first six or seven years, he worked as an installer of kitchen cabinets. In 1983, he became a foreman, supervising the work of other installers, and his title changed eventually to Delivery and Installer Leader.

Marilyn Keenan (Lawrence’s wife) began working for Canac as a foreman in 1983.

Unquestionably, until October 1987, the Keenans were employees of Canac. Then, in mid-October 1987, they were summoned to a meeting with Canac management, at which they were told that they would no longer be employees, but instead, would carry on their work for Canac as independent contractors. The Keenans were also told that they should incorporate.

Further, they were told that under the new arrangement, they would be responsible for paying installers. The installers would provide their own trucks to pick up kitchens from Canac and deliver them to job sites, where they would be installed. Canac would set the rates to be paid to the installers and pay the Keenans, who, in turn, would pay the installers. The Keenans, as Delivery and Installation Leaders, would, as before, also be paid on a piece-work basis for each box or unit installed. However, the amount paid would be increased to reflect the fact that the Delivery and Installation Leaders were being paid gross, without deductions for Employment Insurance, Canada Pension Plan or income tax. Delivery and Installation Leaders would now be responsible for damage to cabinets while in transit, and were expected to obtain insurance to cover such liability.

As a result of this meeting, the Keenans were given a four-page draft agreement addressed to “Keenan Installations” and dated October 19, 1987. This document stated provision such as, “You understand, that as a subcontractor of Canac, you will devote full-time and attention to the business of Canac and shall report to Canac’s Installation Manager,” and Keenan Installations should spend “As much time as is necessary to fulfil the terms and conditions of the contract in attending to the business of Canac and shall report to Canac’s Installation Manager.”

No major change to their agreement

The Keenans talked it over and decided that there was no major change to their arrangement, so they agreed. They did not seek any legal or other advice before signing the document, nor was it suggested by Canac that they should. They did not make any changes to it. They felt that they could trust Canac. Furthermore, they felt that if they wanted to keep their jobs, they had no other choice but to agree to Canac’s terms. They signed the agreement.

Subsequently, the Keenans received Records of Employment from Canac, both stating that their first day of work was January 6, 1986, and last day was October 16, 1987. The reason for the issuance was stated as “quit.” Interestingly, they never paid attention to the ROEs which they received; they never made a fuss about the fact that the dates were wrong and the reason for leaving was “quit.”

Ultimately, the Keenans never incorporated. They did register the business name “Keenan Cabinetry.” They obtained the insurance required by their agreement with Canac, and they registered with the Workers’ Compensation Board. Although they were responsible for cutting cheques to the installers they supervised, the installers were not their employees. Keenan Cabinetry never registered as an employer with the Canada Revenue Agency for the purposes of withholding taxes and other source deductions.

Loyal Canac employees or contractors?

Essentially, the Keenans worked exclusively for Canac until 2007. In that year, the flow of work from Canac slowed down. According to Lawrence Keenan, Canac turned a blind eye to the fact that they took on some work for Cartier Kitchens, a competitor of Canac between 2007 and 2009. However, the majority of their work remained with Canac.

The Keenans continued to consider themselves as loyal employees of Canac:

  • They enjoyed employee discounts
  • They wore shirts with Canac logos
  • They had Canac business cards
  • Lawrence Keenan received a signet ring from Canac for 20 years of loyal service
  • The outside world, and in particular, Canac’s customers, believed that the Keenans were Canac’s representatives

Subsequently, in March 2009, the Keenans were called to a meeting and were told that Canac was going to close its operations and their services would no longer be required.

Canac was not planning on paying any notice of termination to the Keenans, asserting that the company was not required to do so. On the other hand, the Keenans wanted notice of termination after being loyal employees for so many years.

What did the court say?

The court found at one end of the continuum, there is the independent contractor, and at the other end of the continuum, there is the employee. However, there is another category in the middle, called dependent contractors.

Like employees, dependant contractors are owed reasonable notice of termination. In order to determine whether a worker is an independent contractor, the following questions have to be asked:

  • Is the agent limited exclusively to the service of the principal?
  • Is the agent subject to the control of the principal not only as to the product sold, but also as to when, where, and how it is sold?
  • Does the agent have an investment or interest in what are characterized as the tools relating to his or her service?
  • Has the agent undertaken any risks in the business sense, or, alternatively, does the agent have any expectation of profit associated with the delivery of his or her service as distinct from a fixed commission?
  • Is the activity of the agent part of the business organization of the principal for which he or she works. In other words, whose business is it?

In this case, it was clear that the Keenans were dependent contractors:

  • They were limited in their contract to only work with Canac. Although the Keenans performed some work for outside people out of economic necessity, they were not at liberty to work for other kitchen cabinet companies. Other than some inconsequential weekend work and work for friends and family, the Keenans were exclusively working for 20 years with Canac.
  • It was clear that Canac maintained effective control of the Keenans’s business. Canac set the Keenans up as a “buffer” between Canac and its installers, with the objective of avoiding as many as possible of the responsibilities, such as workers’ compensation, paid vacation, employee benefits, etc., as would normally devolve on an employer. However, part of Canac’s approach also meant that it stepped in and took charge whenever it perceived a threat to its efforts to distance itself from the people that it engaged to carry out its business.
  • Although the Keenans used their own tools, they had done this even when they were employees. The tools also included the pager, car phone and mobile phone supplied by Canac. These tools enabled them to carry out their services for Canac.
  • Although it was risky for the Keenans to have to pay an installer without being paid first by Canac, this did not mean the Keenans were independent contractors. They were not free to take on much more work; there was no genuine opportunity to generate additional profits.
  • It was clear that the business was owned by Canac. Even the installers, who were also set up as independent contractors, were required to display Canac’s logo on vehicles they used to transport Canac’s product to the job site. To the outside world, the Keenans were Canac representatives.
  • The arrangement that was created in 1987 was for the benefit of Canac, except for a few business deductions that the Keenans enjoyed.

Since the evidence overwhelmingly favoured the conclusion that the Keenans were dependant contactors, they were entitled to reasonable notice of termination.

It was important to note that they gave Canac approximately 32 and 25 years of service respectively. The court concluded that that 26 months’ notice constituted reasonable notice of termination, plus interest.

What can we take from this case?

As can be seen from this case, employers cannot avoid their responsibilities by pretending their employees are independent contractors. This case and many others demonstrate that it doesn’t matter how the parties choose to characterize the work relationship; a court will look at the factors outlined above to determine the true nature of the relationship.

In cases where workers fall in the middle of the employee-contractor continuum—where they are not truly employees or independent contractors—if they can meet the requirements listed above, they will likely be found to be dependent contractors. It is important to be aware that dependent contractors are still owed termination notice.

When hiring dependent contractors, employers should make sure they enter into written fixed-term contracts.

Term-contract employees (dependent contractors) have a written contract for a fixed term. Upon expiry of the contract, it is understood that the relationship between the parties has ended, with no notice period required. Should the parties wish to continue the relationship, they should enter new negotiations, and this will be stipulated in a new agreement. It is further understood that this fixed-term employment contract is implemented for the sole reason of the nature of the position or specific work project described in the agreement.

It should be made clear, if the term is fixed, the start date and end date should be specified in the agreement. A fixed term contract of less than 12 months will not attract any severance or notice obligations from the employer; however, if the employee is allowed to work even one day beyond the expiration date, or if the contract is for a period longer than 12 months, the employee is covered by the termination requirements specified in employment standards legislation, even if the contract term is expiring. Any series of renewed fixed term contracts will likely be treated as continuous employment for notice and severance purposes under the Act and at common law.

It is also advisable to include a provision for terminating the contract earlier than expected. For example, the contract could be subject to immediate termination in the event of gross misconduct on the part of the employee, or the employee fails to carry out the duties and responsibilities specified in the contract. It should also be noted that where a fixed term contract is terminated by the employer prior to the expiration date, the employer may be held liable for paying the entire balance of the contract as liquidated damages (subject to mitigation).

Canadian courts require fixed-term contracts to be clear and unequivocal, interpreting any ambiguity as to the length of the term. Explain the effect of the fixed-term clause to the employee. State that at the end of the fixed term, the employee will not, at that time, be entitled to statutory or common law notice of termination of employment.

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