Defining the Relationship: Independent Contractor or Employee?

Organizations commonly face the question of whether a relationship with a worker should be characterized as a contractor or employment relationship. Each characterization offers different benefits and creates different obligations for organizations and workers alike. Each also provides for different entitlements upon termination: independent contractor relationships can generally be terminated with little to no notice, whereas employees are entitled to receive notice of termination (or pay in lieu thereof).

In practical terms, issues about a worker’s characterization rarely arise during the work relationship. They most often arise when former contractors seek to be treated as employees after the work relationship has ended. However, that begs the question: What can organizations do to protect themselves from these risks if they mostly come up after the relationship has ended? The Alberta Court of Appeal provided some helpful guidance on this issue in Gerling v. Camrose Regional Exhibition & Agricultural Society.

DECISION

The facts in this case were fairly simple. Thomas Gerling was involved with the Camrose Regional Exhibition & Agricultural Society (Society) for approximately 25 years. He began as a volunteer and progressed into the role of chief executive officer in 2012. He provided services to the Society through a corporation, Papa-T Productions Ltd. The relationship was governed by a management services agreement (MSA).

The Society eventually terminated the MSA. Mr. Gerling disputed the termination. He argued that he had been an employee of the Society (not a contractor) and that he should have received the same entitlements as an employee upon termination. Mr. Gerling sued the Society, and the trial judge found in his favour. The Society appealed the decision.

The Alberta Court of Appeal overturned the trial judge’s finding that Mr. Gerling was an employee. The Court relied on the fact that the MSA indicated that the parties were in an independent contractor relationship. It explained that the parties’ clear understanding of their legal relationship at the time the agreement is signed should “be accorded significant weight particularly when the agreement is in plain language, contains no fine print and is not, on its face, oppressive, unfair or difficult to understand.” There was no reason why the MSA should be disregarded or ignored, in the Court’s view.

The substance of the relationship also supported a non-employment relationship. Specifically:

• the board of the Society was not involved in Mr. Gerling’s day-to-day activities (it was a volunteer non-operational governance board);

• the fees for services were paid to Mr. Gerling’s corporation directly;

• office space, administrative support and computer equipment were contractually provided to Mr. Gerling’s corporation; and

• Mr. Gerling did not work solely for the Society.

The Alberta Court of Appeal concluded that Mr. Gerling was not an employee of the Society for these reasons.

TAKEAWAYS

This case is instructive in important ways. It emphasizes the importance that decision-makers place on the substance of a work relationship, as well as the parties’ intentions in how they chose to characterize that relationship while they were working together. Such an approach appeals to common sense. It allows parties autonomy to structure their relationships to align with business needs and makes it more difficult to resile from a prior agreement when it is simply no longer convenient for them.

In that context, whenever an organization is considering hiring a worker as a contractor or an employee, it should: 

• Think critically about the nature of the relationship. If the worker will be providing services exclusively to the organization for an extended period of time, and if the worker will be highly integrated in the organization, it may not make sense to treat them as a contractor.

• Get a comprehensive agreement in place. Although they will not be determinative, agreements can go a long way to show what the parties’ intentions were. Courts are generally reluctant to override those intentions in the absence of evidence to the contrary.

• Revisit the relationship regularly. Work relationships are rarely static. They change and evolve over time as duties and responsibilities shift. It is best practice for organizations to regularly review contractor relationships and ask themselves whether the characterization is still appropriate after time has elapsed.

While these steps will not resolve every complicated work relationship, they can help organizations prioritize and properly classify workers. This can in turn help mitigate the risk of claims by workers in the future, as well as potential issues relating to withholdings and remittances that may be raised by Canada Revenue Agency and other governmental authorities during an audit. Such proactive steps are also generally part of good corporate governance, as we are seeing an increasing emphasis on proper characterization of workers by prospective purchasers in corporate transactions.

For more information, please contact:

Madeleine Chauvet        +1-403-260-9740

or any other member of our Employment & Labour group.