Court Distinguishes Between Independent and Dependent Contractor:

In 1159273 Ontario Inc. v. The Westport Telephone Company Limited (2022 ONSC 1375) Justice Kershman had to determine whether the relationship between the parties was that of an independent contractor vs a dependant contractor as the Defendant had terminated the Plaintiff. The Plaintiff was not claiming an employment relationship.

In finding that the relationship was that of an independent contractor, the Court was influenced by the following factors :

  1. The two principals of the corporate entities, ( Tom was the Plaintiff and Steve the Defendant) arranged their complex corporate structure with the help of professional tax advisors, thus the structure was not imposed on the Plaintiff.
  2. Tom was a traditional employee of the Defendant from 1977 to 1996. From 1996 until his termination in 2019 he carried out the same duties but through the corporate Plaintiff.
  3. Tom worked full time for the defendant ( 40 hours a week ) and had the title of Director of Technical Services, President and Vice President at various times.
  4. Tom was a shareholder, an officer and a director of the Defendant. Tom and/or the corporate Plaintiff owned one third of the shares in the Defendant until shortly before his dismissal.
  5. An analysis of Tom’s income tax returns indicated that for a a period of 4 years  only 50% of his income came from the Defendant where the other 50% came from other sources. Of the last two years of his relationship with the Defendant , 70% of his income came from the Defendant and the remaining 30% came from other sources.
  6. The primary source of the income from other than the Defendant was from Ancillary Companies, which were all related to the Defendant.
  7. Tom’s income ( not the corporate Plaintiff) derived between 52 % 71% of his income from the Defendant, according to the relevant tax returns. The Court  found that this did not amount to income exclusivity, the central component of a dependant contractor relationship.
  8. Steve and Tom are brothers.
  9. Tom was publicly identified as an owner of the Defendant .
  10. Although Tom had various  executive titles, the Plaintiff, which is a corporation, did not. Of course it is obvious that only a real person can be an officer or a director.
  11. For the time that the Plaintiff had some shares in the Defendant, Tom effectively had some control over the Defendant as he was also a director and an officer, thus the Defendant did not control the Plaintiff to the degree necessary for a dependant contractor relationship to exist.
  12. Notwithstanding that the Defendant provided Tom with an office and thus the tools necessary to do his job, the Judge found that was not a factor in favour of dependant contractor status.
  13. Although there was no expectation of profit or loss in the consulting agreement between the Plaintiff and the Defendant, when one looked at the big picture, Tom ( who was not a personal litigant ) made a profit or a loss dependant on the overall success of the Defendant as he  was a shareholder for most of the time but not at the end.
  14. Although Tom was an integral part of the Defendant, the corporate Plaintiff was not.

My Comments:

This case is very troubling .

At times the judge completely separates Tom from the corporate Plaintiff as when he said that although Tom was the President of the Defendant , the corporate Plaintiff was not. and when he said that although Tom was an integral part of the Defendant the corporate Plaintiff was not.

At other times he looks at the tax returns of Tom, not the corporate Plaintiff, to determine what portion of the income was derived from the Defendant. and what was derived from other entities.

The Judge said at one point that 71% does not show economic exclusivity but 88% does ? Where is the dividing line?  The Judge quoted a Court of Appeal case which states the test as follows:

Exclusivity is a categorical concept — it poses an either/or question, and “near-complete exclusivity” must be understood with this in mind. “Near complete exclusivity” cannot be reduced to a specific number that determines dependent contractor status; additional factors may be relevant in determining economic dependency. But “near-exclusivity” necessarily requires substantially more than 50% of billings. If it were otherwise, exclusivity — the “hallmark” of dependent contractor status— would be rendered meaningless.

I would think that 71% was  “substantially more than 50% of billings”.

In any event, as the Judge found that the Ancillary Companies were the source of the other 30% of his non passive income and that the Ancillary Companies were all related to the Defendant, in essence 100% of his non passive income came the Defendant and its related entities.

Moreover the Judge mentioned a few times that this complicated corporate structure was designed by professionals to minimize Tom’s ( not the corporate plaintiff’s) income tax liability. So what. How is that relevant?

Excuse me, this should have been seen as a simple case of a person who for years was considered to be an employee of the Defendant and then the parties decided to change the structure to save taxes but the Plaintiff continued in the same functional role as before. Whether Tom made other monies over and above his full time job with the Defendant should also be irrelevant. Full time employees often have second or even third jobs. One can wear different hats at the same time. You can be an employee, a director, an officer and even a shareholder. Each has their own set of rights and remedies which are independent of each other. The termination of one status has no effect on the other. This is even more important when the other income is from companies related to the Defendant, not real third parties.

In fact, as the Judge determined, at the time of his dismissal neither Tom nor the corporate Plaintiff owned any shares in the Defendant as Tom had sold his shares to an arms length third party against the wishes of his brother who wanted to buy out his brother but they could not agree on the price.  This is apparently what caused the Defendant to terminate the arrangement with the Plaintiff.

In non legal terms, Tom and his brother were partners and when Tom would not agree to the price his brother was offering, he sold his shares to a stranger, which upset the brother. The brother  returned the favour by firing Tom without paying him a dime.

I am not aware if this case is being appealed.

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