People providing services are either employees or independent contractors. Where an employer decides to terminate the services of an employee without cause, the employee is entitled to “reasonable notice” or pay in lieu of notice as determined by an employment contract or common law, and subject to minimum standards as set out in the BC Employment Standards Act or Canada Labour Code. Because independent contractors do not have the benefit of these statutory minimum standards, many companies assume that unless a contract specifically provides for notice of termination, they do not have any obligations to provide advance notice of termination (reasonable or otherwise) to independent contractors.
This difference in the rights of employees and independent contractors to reasonable notice at the time their services are terminated has increasingly been rejected by our Courts. According to how ‘dependent’ the independent contractor is on a single company for their income, a right to reasonable notice may be implied into the services contract. In the 2009 decision Smith v. Centra Windows Ltd., the BC Supreme Court explained the analysis the Court would use to determine whether the independent contractor was entitled to reasonable notice of termination:
The question of whether a person is entitled to notice is not decided strictly by a finding of whether the person is either an employee or an independent contractor. The authorities note that there is a continuum of arrangements that can exist between a seller and buyer of labour. At the opposite ends of the continuum are these two mentioned states. An intermediate category has been recognized, and the authorities state that in such relationships there is an implied requirement for notice.
The facts of that case are as follows. After working for almost 14 years in commission sales with Centra, Sydney Smith was terminated. At the time of his termination, he was 50 years of age and the Vice President of Marketing and Development. Fees for the services were paid to Mr. Smith’s company, Coquitlam Contracting Ltd.
In terminating Mr. Smith, Centra took the position that he was an independent contractor and was, therefore, not entitled to reasonable notice or pay in lieu of. In rejecting this position, the Court began its analysis with the following observations:
The fact that a person provides services via a corporate vehicle is not dispositive of whether reasonable notice of termination is required. As well, a written agreement stating that a person is an independent contractor is not necessarily determinative. The true nature of the relationship is a question that depends on the facts of each case.
So what does one look at to consider the “true nature of the relationship”? In Centra, the Court took its guidance from two prior decisions of the BC Courts. First, the following questions from Doyle v. London Life Insurance Co., were considered:
- Whether or not the independent contractor was restricted to providing services exclusively to the one company.
- Whether or not the independent contractor is subject to the control of the company, not only as to what services were provided, but also as to when, where and how the services were to be provided.
- Whether or not the independent contractor has an investment or interest in what are characterized as the “tools” required to provide the services.
- Whether or not the independent contractor had undertaken any risk in the business sense or, alternatively, had any expectation of profit associated with the delivery of the services as distinct from a fixed commission.
- Whether or not the activities of the independent contractor was part of the business organization of the company receiving the services. In other words, whose business was it?
Next, the factors identified in Marbry v. Avrecan International Inc. were considered, recognizing that the factors were not exhaustive nor conclusive (and not every factor must be present) when determining where a particular relationship sits on the continuum between an employer/employee relationship and independent contractor/strict agency:
- Duration/Permanency of the Relationship. The longer the duration of the relationship or the more permanent it is militates in favour of a reasonable notice requirement. Amongst other evidence, the purchase and maintenance of inventory, which contains a permanency aspect, should be considered.
- Degree of Reliance/Closeness of the Relationship. As these two interrelated sub-factors are increased the more likely it is that the relationship falls on the employer/employee side of the continuum. Included in this factor is whether the sale of the defendant’s products amounted to a significant percentage of the plaintiff’s revenues.
- Degree of Exclusivity. An exclusive relationship favours the employer/employee classification.
In arguing that Mr. Smith was a true independent contractor, Centra raised the following factors:
- Mr. Smith operated through a separate legal entity, Coquitlam Contracting Ltd.
- Mr. Smith declined an offer of a line of credit from Centra when he joined Centra full-time.
- Mr. Smith hired his team of lead generators, who were compensated out of sales he generated and did not rely on leads generated by Centra until late in the day.
- Mr. Smith could sell leads to other sales representatives.
- Mr. Smith developed and paid for his own sales brochures and conducted some of his own “shows” and “promotions” in addition to Centra’s.
- Mr. Smith had to pay out from his commissions for any errors in filling out contracts such as inaccurate measurements for windows in contracts.
- Mr. Smith signed Centra documentation indicating he was a self-employed sales person.
- Mr. Smith told Ms. Graham that he could sell windows and products other than Centra’s.
- Mr. Smith or Coquitlam Contracting was hired to provide a training seminar for the Homeworks program to Central Hardware and was paid directly.
- Mr. Smith helped the former sales manager for Central Hardware set up a company in Vernon called KMS Windows, from which Centra windows could be sold in conjunction with the Homeworks program and made some sales for KMS.
- Mr. Smith was not required to get approval of his vacation schedule; he could take it whenever he wanted.
- Mr. Smith was free to help set up a dealership in Edmonton, Alberta where Centra “supply only” windows would be sold.
The Court also considered the following factors, which supported a finding that Mr. Smith was not a “true” independent contractor:
- The written agreement between Centra and Mr. Smith executed in 1992 made no reference to an “independent contractor” relationship and contained no termination date.
- The agreement also provided for a medical and dental plan, which required Centra to pay 50%
of the cost while Mr. Smith was required to work exclusively for Centra.
- Centra sought Mr. Smith’s personal services, and not those of a corporate entity.
- Mr. Smith’s company was incorporated at the request of Centra.
- Mr. Smith was appointed Vice President of Marketing and Development, a position that the Court viewed as demonstrating his close and strong relationship with Centra. In that position, Mr. Smith was viewed as a member of the senior management of the company
- Mr. Smith was a director of Centra, reinforcing his integral role with the company.
- Mr. Smith was contractually bound to sell Centra windows and the company conceded that he spent at least 80 – 90% of his time working for it.
- Mr. Smith purchased shares in the company under an employee share ownership plan which required that at 90% of his annual revenues had to come from Centra.
- Mr. Smith did not seek work from other sources.
- Mr. Smith was enrolled under the company’s Group Benefit Plan which plan required that members be full-time employees of Centra.
- Mr. Smith was provided with office space and equipment, administrative, secretarial and office support, as well as office supplies. He was also reimbursed for his business-related expenses.
- Mr. Smith received a bi-weekly paycheque from Centra, and Mr. Smith’s own lead generators were paid through Centra.
- Mr. Smith was given explicit instruction on how to conduct many aspects of his work.
- Mr. Smith participated in staff activities such as the annual Christmas party and organized the annual company golf tournament.
After reviewing the various factors for and against an “independent contractor” arrangement, the Court concluded that:
… the factors that support the finding of a relationship very close to one of employee/employer are numerous and substantial and override those put forth in denial of such a relationship. Mr. Smith was highly integrated into Centra, he was bound by exclusivity to Centra, his activities were under close control of Centra, his remuneration was essentially all from Centra, his relationship with Centra extends back to the company’s early years, he was involved in the company’s leadership group, and he was closely involved in other activities in the life of the organization such as developing its first website and organizing its annual golf tournaments. Mr. Smith kept Mr. Tilstra advised of his various activities with Central Hardware, KMS, and Mr. Ferrone. I am satisfied that Mr. Smith was in a relationship with Centra that entitled him to a reasonable period of notice.
The Court held that 15 months was required as “reasonable notice” to Mr. Smith and awarded him damages accordingly.
The Centra decision reaffirms the fact that the distinction between the employee/employer relationship and the independent contractor/strict agency relationship is not always clear cut. It also underscores the importance of addressing in the written agreement underlying any service relationship how the relationship can be terminated, and ensuring that the notice provisions are not contrary to minimum standards pursuant to the Employment Standards Act or Canada Labour Code, in case the relationship is later deemed to be that of an employer-employee.