Owner-Operators as Dependent Contractors: The Canadian ConTexT

Kim E. Stoll* and Jaclyne Reive†

In Canada, the Courts have recognized that a person may be independent from an employer-employee relationship in the common law contractual sense but be entirely dependent in an economic sense. These persons are considered “dependent contractors” and there are certain legal ramifications associated with such a classification. Two important areas of concern are the termination of the relationship between the parties, and workers compensation.

This paper will examine some of the prominent Canadian and Ontario case law regarding the characterization of independent versus dependent contractors and its implications on the relationship between carriers and drivers.

Why is this characterization important in the

Canadian context?Why is the characterization of

a person as an independent versus dependent contractor important? A dependent contractor is treated very similarly to an employee, entitling him or her to certain rights under various labour and employment statutes. For example, owner-operators who are retained as independent

contractors are not considered workers or employees of the carrier for the purposes of the Canada Labour Code, RSC 1985, c. L-2, (the “Code”) and are therefore not entitled to the right of association, the right to strike and other related rights under the Code.

An “employee” is defined in the Code as “any person employed by an employer and includes a dependent contractor and a private constable, but does not include a person who performs management functions or is employed in a confidential capacity in matters relating to industrial relations.” If carriers are employing owner-operators who are properly characterized as dependent contractors, then these carriers should keep in mind that they may become vulnerable to a unionization drive or an application for certification.

Additionally, some advantages for use of independent contractors are: (1) overtime compensation is not owed to an independent contractor; (2) employee benefits do not have to be provided, nor do employment taxes have to be paid or witheld; (3) the work relationship is governed by contract and not by laws governing compensation; and (4) skills training is not usually necessary.

However, some disadvantages to use of independent contrators include: (1) companies often regret situations where non-employees develop expertise about the company business, only to have the workers move on to a new customer when the contract

expires; (2) misclassification of employees as independent contractors can result in severe legal penalties and/or legal liability; (3) independent contractors often charge a premium for their services; and (4) lack of contractor knowledge about the company’s specific needs.1

Characterization by the Courts of Independent vs Dependent Contractors

Owner-operators who work under a contract where there is a high degree of control by the other party, such as a carrier company, are often found by courts to be dependant contractors.

The Ontario Court of Appeal recognized as far back as 1936 in Carter v Bell & Sons, [1936] OR 290, that there is an intermediate status between employee and independent contractor that should be given legal recognition. This “intermediate status” would eventually be coined as “dependent contractor.”

Initially, exclusivity in the sense of being able to work for other companies did not play as large of a role in the determination of dependency. In Mercury Tankline Lease Operators’ Assn. Inc v Mercury Tanklines Ltd., 1984 CarswellNat 732, the Canada Labour Relations Board (“CLRB”) heard an application for union

*Partner Fernandes Hearn LLP (Toronto, Canada)†Associate Fernandes Hearn LLP (Toronto, Canada)

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certification on behalf of certain owner-operators and drivers who worked for the defendant. The CLRB stated that with respect to the owner-operators, it had “no difficulty finding that they are employees within the Code.” The CLRB did not elaborate on how it came to this conclusion but did note that the majority of the owner-operators were “leased” to the defendant and were incorporated companies.

The CLRB took issue with those owner-operators who also leased vehicles and drivers to the defendant. The CLRB noted that at first glance, these owner-operators looked like employers because they paid their drivers and covered their unemployment insurance and workers compensation. However, the evidence showed that the drivers must at all times be suitable to carry out the defendant’s business and are subject to the defendant’s approval prior to performing any services. The CLRB found that the Drivers Manual also implied that someone other than the owner-operators was the real employer and held that they were little more than agents and supervisors for the defendant vis-à-vis the drivers. The application for union certification was allowed.

Notably, one of the CLRB Board Members dissented on the basis that although the factual situation above was accurate, there was evidence of non-exclusivity, which should have been taken into account. The Board Member noted that some of the tractors bore the logo of the defendant company while others did not, because they were used for the operations of other companies as well, even if the defendant was the chief user of the services of the tractors. However, this decision was not appealed.

A few years later, the CLRB started to put an emphasis on exclusivity and came to a different reasoning than in Mercury Tanklines. In Canada Post Corp v Association of Rural Route Mail

Couriers, 1987 CarswellNat 1030, the CLRB heard another application for union certification and was required to determine the nature of the employment relationship between the mail couriers in question and Canada Post. The CLRB held that the mail couriers were dependent contractors due to the high level of economic dependency that the mail couriers had on Canada Post. The CLRB noted that the mail carriers’ main source of income was Canada Post, but stated that income source alone was not always a determinative factor in the consideration of whether someone was economically dependant. The CLRB also considered that as a result of the nature and length of time it took to perform their courier work, it was virtually impossible to work for another company, thereby creating a situation of economic dependency. Furthermore, the CLRB found that their contract contained a provision, which indicated that outside employment was not permitted while the couriers worked for Canada Post. The high level of exclusivity combined with Canada Post being their main source of income created a situation of economic dependency and therefore, the CLRB characterized the couriers as dependent contractors.

Presently, the leading federal case in the owner-operator context regarding whether a contractor is independent or dependent is Teamsters Local 938 v Mackie Moving Systems Corp., 2002 CIRB 156, where the Canadian Industrial Relations Board (“CIRB”) stated that if upon the application of the Code definition of “dependent contractor”, all of the criteria set out are met, this is sufficient to establish at least a presumption of economic dependency, which is determinative of the issue. The criteria are as follow:1. The person is the owner, purchaser,

or lessee of a vehicle;2. The vehicle is used for hauling

goods or merchandise;3. The person is a party to a contract,

oral or in writing;4. The person is required to provide

the vehicle by means of which he performs the contract and to operate the vehicle in accordance with the contract; and

5. The person is entitled to retain for his own use from time to time any sum of money that remains after the cost of his performance of the contract is deducted from the amount he is paid, in accordance with the contract, for that performance.In cases where there are strong

indicators of economic dependency, a dependent contractor relationship will often be found. Based on the factors considered by the CIRB noted below, exclusivity is an important indicator: where a contractor is required to provide his or her services exclusively, or almost-exclusively to the company/employer, economic dependency will be found.

This is even the case where drivers have the option in theory to work for other companies, but in reality, the circumstances do not allow for the opportunity to come to fruition. Similarly, where the contractor is required to use the company/employer’s operating authority or where the company/employer takes the responsibility of plating the vehicle, a situation of dependency will likely be found to exist.

In Mackie, the CIRB considered the following factors in its determination that the owner-operators were dependent contractors:• Owner-operators were party to

identical or nearly identical contracts imposed by the transport company;

• The trailers hauled by the owner-operators were owned by the transport company;

• Owner-operators used the company’s CVOR/operating authority and fleet insurance and reimbursed the company for their costs;

• The license plates on the owner-operators’ tractors were generally in

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the company’s name as they had to be registered in the same name as the CVOR;

• Owner-operators were required to reimburse the company for the cost of the plate;

• The company tried to convince the Board that owner-operators were free to drive for other companies but the facts were that the owner-operators did not drive for anyone else and derived all of their income from the company;

• The owner-operators’ tractors were required to display the company’s name;

• Owner-operators were required to attend mandatory company training sessions and were paid for attending;

• Owner-operators were dispatched by the company and had to maintain communication with same;

• Pickup and delivery times were scheduled by the company and their mileage and hours of work and amount of remuneration were determined by the company;

• Owner-operators were subject to the same rules and regulations as salaried drivers;

• Owner-operators were required to use the company’s paperwork system and submit same to the company;

• Owner-operators were required to have a regular starting time and notify the company if they were unable to report; and

• Owner-operators were required to keep and maintain their equipment in good condition and to subject the equipment to company inspection.

The dependent contractor test set out in the Code applies equally to owner-operators who contract with the carrier in their capacity as a corporation rather than individuals. As previously noted, the Code defines an employee as “any person employed by an employer and includes a dependent contractor […]” (emphasis added). The Interpretation Act, RSC

1985, c I-21, s 35(1), defines “person” as “any word or expression descriptive of a person, includes a corporation.”

This was confirmed in Colispro Inc. et STTP, Re, 2013 CIRB 680 at 74, where the court approved a request for certification of a union on behalf of a number of corporations operating as dependent contractors. The union argued that “the fact that a person covered by a certification application is incorporated is in no way determinative in deciding whether that person is an employee […] the Board should look behind the corporate veil to determine whether the persons who chose to incorporate are employees of Colispro […] each broker and driver who has incorporated is the sole director and shareholder of the company (at para. 49) The union also noted that in this case, with the exception of two owner-operators, the companies covered by the application depended on their contract with Colispro for their entire revenues (at para. 41).

However, it should be noted that the CIRB in Mackie agreed with the union’s decision not to represent certain owner-operator corporations because they did not drive exclusively for Mackie and were not economically dependent on Mackie to a degree where they derived their income exclusively from Mackie (at paras. 223-224).

The leading case in Ontario regarding whether a contractor is independent or dependent is McKee v Reid’s Heritage Homes Ltd., 2009 ONCA 916. The Court of Appeal stated that the first question that must be determined is whether the owner-operator would be considered an employee or an independent contractor. The Court set out 5 factors that must be considered in this analysis:1. The agent is limited exclusively to

the service of the principal2. The agent is 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

3. The agent has an investment or interest in what are characterized as the “tools” relating to his service

4. The agent has undertaken risk in the business sense or has any expectation of profit associated with the delivery of his service as distinct from a fixed commission

5. The activity of the agent is part of the business organization of the principal for which he works—i.e. “whose business is it?”Once it has been established that

the owner-operator is an independent contractor, the Court must consider whether the contractor provides his services exclusively or almost-exclusively to the “employer” such that there is economic dependency. This factor is determinative after it has been established that the owner-operator is an independent contractor. If the contractor works exclusively or almost-exclusively for the employer, then he is considered a dependent contractor.

McKee was cited in Wyman v Kadlec, 2014 ONSC 4710, for the principle that the need for notice of termination arises where there is a situation of high exclusivity of work. In this case, the plaintiff worked as a resort manager for the defendant resort owner under a verbal agreement and the court had to decide what was the nature of the business/employment relationship. In deciding that the plaintiff was an independent contractor rather than a dependent contractor, the Court considered that the plaintiff:• The parties regarded their

relationship as one characterized by independence;

• There was no fixed term to their agreement and no penalty for lack of notice of termination;

• There was no guarantee of minimum commissions to be paid;

• The plaintiff characterized himself as “semi-retired” when he first started working for the defendant;

• The plaintiff had a second source of

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income—a workers compensation pension;

• The plaintiff determined the manner and time of his work;

• The plaintiff solicited his own customers and was not dependent on the defendants to supply them;

• The plaintiff hired others to take his place if he wasn’t there and went on vacation;

• At one point, the plaintiff was only at the resort for a few hours, three days a week;

• The plaintiff advised the Canada Revenue Agency that he was self-employed; and

• The plaintiff described himself as an independent contractor to the defendants.

Based on these factors, the Court decided that the plaintiff was an independent contractor and not entitled to notice of termination.

The McKee test was recently reiterated and applied in Keenan v Canac Kitchens Ltd, 2015 ONSC 1055, aff’d 2016 ONCA 79. The Court of Appeal affirmed the trial decision and provided further guidance on the definition of “dependent contractor”.

Recent Case Law: A review of Keenan v Canac KitchensThe trial judge in Keenan v Canac

Kitchens found that the plaintiffs were dependent contractors and so awarded damages. Canac’s appeal was based on one aspect of the trial court’s finding, being that of “exclusivity”. The Ontario Court of Appeal, in dismissing the appeal, agreed with the trial court that the plaintiffs had worked exclusively or with a high level of exclusivity for Canac and were “dependent” contractors.

Facts Canac was a manufacturer,

distributor, and retailer of kitchen cabinets and related accessories. The plaintiff, Lawrence Keenan, worked for

Canac starting in 1976. Mr. Keenan worked as an installer of kitchen cabinets for 6-7 years and in 1983, he became a foreman, supervising the work of Canac cabinet installers in new homes. Marilyn Keenan began to work for Canac in 1983 as a foreman. They were full time employees. In 1987, they were told at a meeting that they would henceforth be contractors as opposed to employees.

Canac told the Keenans that their titles were “Delivery and Installation Leader” and that, going forward, installers would provide their own trucks and pick up the kitchens from Canac. They would then deliver the kitchens to job sites for installation. Canac would set the installers’ rates and provide the Keenans amounts to pay the installers. The Keenans were also then responsible for any in transit damage to the cabinets and were expected to obtain insurance to cover those costs. The Keenans continued to be paid, as before, on a piece work basis for each box or unit installed; however, the amount was increased to reflect the fact that they were paid in gross, without deductions for income taxes, employment insurance and CPP.

Shortly thereafter, the Keenans were provided with a draft agreement reflecting the new arrangements and which described them as “subcontractors” who were required to devote “full time and attention” to Canac. Only Canac and Mrs. Keenan signed the agreement. The Keenans did not obtain independent legal advice.

The Keenans’ relationship and duties with Canac essentially remained unaltered and they considered themselves loyal employees. They never incorporated, carrying on business as Keenan Cabinetry, a sole proprietorship, and working almost exclusively for Canac to the end of 2006. They received employee discounts, wore shirts with the Canac logo, and used Canac business cards. Mr. Keenan received a signet ring for 20 years

of loyal service. For all intents and purposes, the Keenans appeared to the outside worlds as Canac’s employees.

The Keenans did perform some weekend jobs and work for friends and family and also for Cartier Kitchens at the beginning of 2007. Their work with Canac had slowed down and Canac turned a blind eye to this extra work with Cartier Kitchens.

The Keenans’ relationship with Canac came to an end on March 15, 2009, when they were told by Canac that it was closing its operations and that their services were no longer needed. Canac considered the Keenans to be independent contractors and, as a result, the Keenans received no notice, payment in lieu of notice and no payment of any statutory entitlements.

Canac appealed the finding by the trial court that the Keenans were dependent contractors, citing specifically the Keenans lack of exclusivity as at the date of termination regarding their work for Canac.

The Trial Decision The trial judge considered McKee

v. Reid’s Heritage Homes Ltd. reviewed above, and noted that those five principles also applied to distinguishing employees from dependent contractors (at para. 18).

The trial judge found that: (1) all five principles favoured a finding that the Keenans were dependent contractors from 1987 until termination; and (2) the Keenans were economically dependent on Canac because they worked exclusively for Canac or at a high level of exclusivity. His Honour stated at para. 17:

The common law in Ontario, relating to dependent contractors, is now well established. Employment relationships exist on a continuum; with the employer/employee relationship, at one end of the continuum, and independent contractors at the

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other end. Between those two points, lies a third intermediate category of relationship, now termed dependant (sic) contractors.The trial judge found that the

Keenans were dependent contractors and entitled to proper notice of 26 months upon their dismissal without cause.2

The AppealThe Ontario Court of Appeal

dismissed Canac’s appeal from the trial judge’s finding that the Keenans were dependent contractors and went on to provide further guidance on Canac’s only issue with that finding, being that of “exclusivity”.

Canac argued that, while the Keenans worked exclusively for Canac up to the end of 2006, thereafter and until termination, the Keenans also worked for its competitors, Cartier Kitchens. Further, Canac contended that exclusivity should be determined at the time of termination of the relationship and, therefore, because the Keenans did not work exclusively for Canac for about two years prior to termination, the trial judge erred in his finding that the Keenans were “dependent” contractors.

The Court of Appeal, however, saw no reason to interfere with the trial judge’s finding of “exclusivity or near exclusivity”.

Rather, the Court of Appeal noted, para. 24, the trial judge’s observation that, in the jurisprudence recognizing an intermediate category of “dependent” contractors, a finding that “the worker was economically dependent on the company due to complete exclusivity or a high level of exclusivity weighed heavily in favour of the conclusion that the worker was a dependent contractor.”

The Court of Appeal found that trial judge’s observation was vital to understanding how the trier of fact should approach the question of

exclusivity. At para. 25, the Court of Appeal provided further guidance for future cases:

Exclusivity cannot be determined on a “snapshot” approach because it is integrally tied to the question of economic dependency. Therefore, a determination of exclusivity must involve, as was done in the present case, a consideration of the full history of the relationship. It is for the trial judge to determine whether, after examining that history, the worker was economically dependent on the company, due to exclusivity or a high level of exclusivity. The fact that the Keenans did

some work for a Canac competitor in the two years prior to the end of the relationship at the end of 2006 was examined in context by the trial judge. The Keenans had worked exclusively for Canac for a significant period of time whereas the services for Cartier Kitchens were for a relatively short period, and done in response to a slowdown in work from Canac. Canac also turned a “blind eye” to that work.

Furthermore, on the findings of the trial judge, during the period that the Keenans provided services to Cartier, the “substantial majority” of their work continued to be done for Canac; specifically, 97.5% of the Keenans’ income was from Canac. Further, of the approximately 32 and 25 years of service that Lawrence Keenan and Marilyn Keenan respectively gave to Canac, in all but two of those years, they exclusively served Canac.

The Court of Appeal found that, where there was less than complete exclusivity, a review of work history and relationship between the parties was necessary to determine whether there was a “high degree” or level of exclusivity.

FinallyIt is clear that just because an owner

operator is identified in an agreement as an “independent contractor”, this may not be enough to establish that he/she is truly “independent”, but rather could be an employee or a dependent subcontractor. Review of the criteria discussed above plus the analysis regarding a full work and relationship history between the parties, as outlined by the Court of Appeal in Keenan v Canac Kitchens, above, must be carefully undertaken in the Canadian context when drafting agreements or contracts going forward.

For example, to attempt to avoid having the relationship characterized as one with a “high degree” of exclusivity or one of economic dependency, carriers in Canada might, for example, provide drivers with the opportunity to seek hauling opportunities with other companies when they are not in the service of the carrier. Rather than promoting a relationship of exclusivity, the decision as to whether to haul for third parties is left then with the owner operator rather than the carrier. In Keenan v Canac Kitchens, however, Canac did not acknowledge that Keenans were working for a competitor and had turned a “blind eye” to that work. Further, the Keenans had essentially been converted to “independent” contractors without any real notice, input or a properly drafted contract. Such factors allowed the Court to find that the relationship between Canac and the Keenans was one of exclusivity or near exclusivity and that of a dependent contractor.

The appeal decision in Keenan v Canac Kitchens has now confirmed and clearly sets out that any assessment of an owner operator’s status must include a full history of the relationship between the two parties as at the specific time in question and is, ultimately, fact specific.

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Endnotes 1 Cross, Dan J. “Legal Issues with Use of Independent Contractors”, The Entrepreneur’s Resource, entrepreneurship.org. 2 In Ontario, dependent contractors and employees, if dismissed from employment “without cause”, are entitled to “notice” damages, which may

include possible statutory payments, payment in lieu of notice and working notice, subject to applicable contractual provisions. The issue of the length of notice for the Keenans is not canvassed in this article although that ground of appeal was also dismissed.

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