Friday, September 20, 2013

Independent Contractors vs Employees: What if the worker has his own company?

The Ontario Superior Court of Justice recently released a judgment in the case of Legge v. TEKSmed Services Inc..

It's a fairly basic wrongful dismissal case in a lot of ways:  Senior executive of the company, middle-aged, dismissed without notice after just over six years of service.  He was awarded 13 months' pay in lieu of notice.

But there are a few interesting questions here.

The Plaintiff was Incorporated

At trial, this wasn't really argued as an issue, but the question of whether or not he was an employee is nonetheless worth noting:  He incorporated a company through which he provided his services to TEKSmed, which would ordinarily build into an argument that he was an independent contractor, and not an employee entitled to reasonable notice.

The employer didn't really argue it, though, and in fact upon realizing that the arrangement "would not survive a payroll audit" had reverted to a traditional employment relationship prior to termination.

The trial judge rightly noted that "the employee's use of an incorporated entity did not trump the determination that he was, at all times, an employee".

The courts (and administrative tribunals, and the CRA) will not blindly accept the parties' characterization of a relationship as being an independent contractor relationship.  There are plenty of statutory protections and obligations relating to employees, which you can't contract out of, and therefore the law is more than willing to lift up the carpet on a supposed 'independent contractor' relationship and look at whether or not the terms of the relationship itself look more like those of an employment relationship.


There's nothing particularly interesting about this - the employer took the typical 'kitchen sink' approach to alleging failure to mitigate, and the court largely deferred to the employee's reasonable judgment in the circumstances, but found that his efforts weren't "as wholeheartedly energetic as one might expect", so reduced his entitlements from 13 months to 12 months.

But part of the reason that the employee's limitations on his job hunt were reasonable was because the employer was seeking to impose non-competition obligations.  The lesson for employers being this:  If you want to take advantage of the dismissed employee's mitigation obligations, you have to let the employee accept new work.  (Incidentally, there's some Alberta jurisprudence from a few years back suggesting that a dismissal without reasonable notice, amounting to a repudiation of the fundamental terms of the employment contract, relieves an employee of non-competition obligations, too.  I don't know of any Ontario case law on the point, but it wouldn't surprise me if the Ontario courts followed Alberta's lead.)

The second interesting point about mitigation is that the employer argued that the employee "failed to keep the Defendant advised of current job searches", and the employee answered that "he did not know that this was an obligation", and there was no evidence that the employer had ever requested it.

Unless there's something in his contract - which is unlikely - the better answer would have been that he was not obligated to do so.  Or at least, not by anything inherent in the obligation to mitigate.  Granted, in litigation, there's an ongoing obligation to disclose any relevant documents to the opposing party, but that's a procedural rule, not a substantive legal obligation.  The obligation extends only to certain specific disclosures, and not generally to a full-on obligation to keep the other party apprised of all progress, and the consequences of failing in those obligations are mainly procedural - typically, if you're not giving me the documents to which I'm entitled, I'll bring a motion to compel you to do so, and if you still refuse, then I'll bring a motion to dismiss your case.  If you try to lead evidence at trial that you haven't produced, then I'll object to it being admitted, and if it's admitted I may ask for other relief, such as an adjournment and/or cost consequences.

The obligation to mitigate is to seek to reduce your loss.  There is absolutely no requirement to advise the person who caused your loss of the specific steps you're taking, and under no circumstances would failing to do so constitute a failure to mitigate.  (Seriously, that would be kind of silly, as a freestanding obligation:  I'm looking for a new job in the same industry, and I have to give an advance heads-up to the employer who fired me that I might get an offer from competitor x?  Seems like a pretty commercially unreasonable thing to require.)

Pay Level

Okay, here's the tricky one:  He was compensated at $120,000 per year...until December 2011, when his salary was reduced to $70,000 per year.  The termination occurred only 2.5 months later.

So is his pay in lieu of notice to be calculated on the basis of $70,000 per year, $120,000 per year, or something in between?

The trial judge concluded that the appropriate scale is $70,000, because the employee had apparently not objected to the pay cut.

This is troubling.  For two reasons:  Firstly, a pay cut of that scale is absolutely a 'constructive dismissal' level change, and 2.5 months of silence is probably not sufficient for an employee to be said to have actually accepted the change at law, as the jurisprudence encourages employees to take a "Let's give the modified conditions a chance" approach.  (Indeed, there's an argument to be made that, in the event of such a pay cut, he'd be entitled to sit on it for almost two years and then simply sue to be topped up through a period of 'reasonable notice'.  The only case law on point, however, deals with a scenario where the employee objected within a reasonable period of time.)

Secondly, and more importantly, there are broader implications.  There are only two possible reasons that an employee would accept a 40%+ pay cut:  Either he's agreeing to a contract modification in order to get something valuable directly in exchange (reduced hours, shares or profit-sharing, etc.), or else - as was probably the case here - he accepted the change because he thought it improved his job security.  Presumably, he recognized that this pay cut was unreasonable, but didn't protest because he knew that the company's alternative was just to fire him.

The precedent value of this decision is this:  If an employer is planning to fire an employee, it may be able to significantly reduce its notice obligations by slashing the employee's pay first.  And frankly, that's just not good employee relations.

Share Redemption and Comma Usage

Legge's corporation had been given 8 shares of the company, which Legge was advised had a value of $20,000 each.  However, there was an agreement indicating that, upon the cessation of the relationship for any reason, the employer "retains the right to immediately and automatically retract the 8 shares gifted for $0.00 consideration."

The employer's interpretation - and probably the intention when drafting it - was that it wouldn't have to pay for the shares.

However, the judge read the language quite literally, and concluded that the $0.00 was a descriptor of the consideration for which the shares were originally gifted.  Which, on a close analysis of the grammar, seems right to me.  If they were to break the clauses with a comma, it would have resolved the structural ambiguity:  "retract the 8 shares gifted, for $0.00 consideration."  But that's still awkward.  Better yet would have been "retract the 8 gifted shares, for $0.00 consideration."  And if you really wanted the utmost clarity, you might insert the consideration earlier:  "retract, for $0.00 consideration, the 8 gifted shares."

Amazing, isn't it, how shifting around a few words and adding a couple commas can be the difference between owing nothing and owing $160,000, eh?  That is why lawyers get paid the big bucks.  Well, that, and the fact that our professional liability insurance is expensive because of the prospect of a missed comma.

Of course, I'm not entirely sure that it's proper for the judge to have completely disregarded the corporate veil issues:  Legge's corporation, which technically held the shares, wasn't a party to the proceedings.  Why would Legge be entitled to be paid personally in exchange for arranging the conveyance of shares he doesn't own?

Character of Employment

Just a brief comment on this front:  In cases of long-service front-line and unskilled labourers, character of employment has been remarked to be of diminishing relative importance.  However, the converse has not yet been shown to be true, in that short-service senior employees are not getting reduced notice periods.  This is such an example: a 13-month notice period for a middle-aged employee with 6 years of service, and little evidence on the availability of replacement employment, clearly relies heavily on the character of employment.

With that in mind, this debate traces back to the Cronk case in the 90s, when the Court of Appeal came down hard on Justice MacPherson for disregarding character of employment, and I like to point out some commentary by Justice Morden at the Ontario Court of Appeal:
In any event, even if MacPherson J. was correct in concluding that no valid distinction exists for the purpose of determining the proper notice period between the positions of senior and junior employees, it does not follow from this, on the materials which he considered to be relevant, that Ms. Cronk is entitled to twenty months' notice.  Once the distinction is gone, then substantially reducing the notice period for senior employees is just as logical, if not more logical, as increasing it for junior employees.  This is so particularly in the light of the fact that, in the sample of cases on which the learned judge relied in arriving at his conclusion, the average period of unemployment following dismissal was, as he noted more than once, 9.3 months.  If the availability of other employment is to swallow up the character of employment factor then it would seem that the period of reasonable notice for senior employees should be substantially reduced.

This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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