Monday, January 27, 2014

The Plight of an "Independent Contractor"

There's an unusual case out of the Federal Court in VIH Helicopters Ltd. v. Rennie.  Hat-tip to Ian Mackenzie of Mackenzie DRS for posting and tweeting about it.  The issue, fundamentally, is whether or not a worker was an employee or independent contractor.  Though it's somewhat more nuanced than that.

The differences between employees and independent contractors is a topic I have frequently addressed before.  There's a common misconception that, if you hire someone on as an 'independent contractor' instead of an employee, that relieves you of a number of obligations (employment standards obligations, EI, CPP, etc.)...and that the difference is entirely in what you call the relationship.

What you call the relationship is a factor, but it isn't determinative.  There are well-established legal tests that Courts will apply to lift up the rug on a supposed independent contractor relationship and determine whether or not it is, in substance, an employment relationship.  But the Rennie case cuts the other way, suggesting that Mr. Rennie couldn't claim to be an employee after holding himself out as an independent contractor to the employer, to the CRA, and to the courts in a matrimonial dispute.  It's interesting, but somewhat troubling.

Procedurally, it's a little bit different from your average wrongful dismissal.  Mr. Rennie sought unjust dismissal damages under the Canada Labour Code - the Federal jurisdiction statute that applies to employment relationships in a fairly narrow range of industries.  The CLC provides for an administrative tribunal process by which an adjudicator determines unjust dismissal questions, and if a party isn't happy with the result, they can apply for "judicial review" to the Federal Court, arguing that the adjudicator made an error of law.

This decision is on such a judicial review application.

The Facts

The worker at issue in the case is a helicopter maintenance engineer named Matthew Rennie.  He began working for VIH in or around summer of 1993.  VIH had 93 people doing the same job, 80 being employees and 13 choosing to be characterized as independent contractors.  VIH apparently wanted to make him a "full-time employee", but Rennie opted instead to be, as he testified, a "contract employee".

(As a note of terminology, Justice Zinn put little emphasis on Rennie's use of the phrase 'contract employee', considering the terminology to be self-serving, redundant, and at best putting the relationship into the 'dependent contractor' category, which doesn't work for "unjust dismissal" complaints under the CLC.  However, I look at that terminology as having a different emphasis.  While Justice Zinn is right about the redundancy of the phrase, it's most often used to describe fixed term contracts of employment.  This understanding of the language may or may not be consistent with the agreement they actually entered into, but it is fully consistent with Rennie's use of it in his own testimony.)

Rennie initially invoiced through an unincorporated business name, Matt Rennie Engineering.  The pay structure looked like an independent contractor relationship - he charged GST, he didn't get paid vacation, no withholding for tax, CPP, or EI, etc.

In 1996, VIH wrote to Rennie advising him that he didn't meet their accountant's requirements for a 'contractor', and that to continue to be a 'valid contractor', he needed to satisfy a number of demands - basically, resign and enter into a new contract via an incorporated company.  (For background on the effect of a corporation in an "independent contractor versus employee" dispute, look at this post.)

A similar letter was sent out in 1998.  Eventually, all the terms were complied with, except that no resignation letter was ever provided.  Rennie's father, Clifford Rennie, incorporated a company called "Blue Stone Engineering Ltd.", which entered into a consulting agreement with Matthew Rennie, and VIH retained Blue Stone to provide Matthew Rennie's services.

In 2008, VIH notified Blue Stone that it was terminating its contract, on 14 days' notice as required by the contract.

The Nominal Issue:  Did the Arbitrator Err by Excluding the Matrimonial Affidavits from Evidence?

In 2000 and 2001, affidavits from both father and son, characterizing the relationship as an independent contractor relationship, were put into evidence in a matrimonial proceeding between Matthew Rennie and his wife.

VIH wanted to lead those affidavits into evidence.  The adjudicator declined to admit them into evidence at the initial hearing, for five reasons:

Reason #1:  The Affidavits were Stale

The adjudicator noted that the affidavits were sworn several years before the cause of action arose.  Justice Zinn rejected this reason, highlighting that there was no contention that the nature of the relationship had changed since the affidavits were sworn.  That's a fair point.  However, it appears that the contract between the parties were renewed on an annual basis, and it may deserve a little more discussion when the contract, of which VIH argues the affidavits should inform the interpretation, was dated some 7 years after the affidavits were sworn.

Reasons #2 and #4:  The Affidavits had a Different Purpose

The adjudicator notes that the affidavits were sworn in an unrelated family law matter.  Justice Zinn's response basically amounts to "So what?"  They were sworn by their affiants, so if they speak to the matters in issue in this proceeding, they should be admitted.  I'm inclined to agree with Justice Zinn on this point.  Except that I'm not so sure that they're relevant, but that comes later.  Also, these reasons strengthen the adjudicator's point in reason #5, but that too comes later.

Reason #3:  The Affidavits are not Relevant

Okay, I'm paraphrasing in this subtitle.  The adjudicator noted that "[c]ase authorities already referred to by me on the issue of whether the complainant was an employee or an independent contractor at the time of his dismissal depends on the true nature of the employment relationship as analyzed and assessed under common-law principles and not on the parties' views, statements or understanding of the legal effect of such relationship."

The choice of words is a little soft, but the point is overall pretty accurate on the law.  However, as Justice Zinn points out, the parties' "views" are in fact relevant to the test, though not a determinative factor.  However, when you're faced with the contracts themselves, signed by the parties, expressly indicating that it's an independent contractor relationship and not an employment agreement...I seriously doubt that it the characterization of the relationship by the parties, for the purpose of the Wiebe Door test, is going to be an issue in dispute.  The intention of the parties was to create an independent contractor relationship.  That's right there in black and white.  So rather than beating a dead horse by admitting more and more evidence of Rennie calling himself an independent contractor, you'd think they'd move on to other factors.  And perhaps more importantly, what Rennie called himself in other contexts is irrelevant to the Wiebe Door test.  (My point is that, if Rennie was saying, "I didn't understand the contract language, and never realized that the terms of the contract disentitled me to protection under the Canada Labour Code", I would call that contention irrelevant to the Wiebe Door test.)

Justice Zinn also notes that the affidavits were relevant to the "estoppel issue in dispute".  I'll explain the estoppel issue in more depth, but suffice it to say that that simply cannot be right.  Estoppel, of the sort relied upon by VIH, requires reliance by the party seeking to assert it.  It is completely impossible, at law, that an affidavit sworn by Matthew Rennie in a matrimonial proceeding against his wife could have been relied upon by VIH in a way that would generate an estoppel.  It's even more problematic to suggest that Clifford Rennie's affidavit can estop Matthew Rennie from pursuing a remedy.  But more on estoppel later.

Reason #5:  Clifford Rennie is Deceased

The father passed away, and could no longer be cross-examined for clarification of the evidence in his affidavit.  Justice Zinn queried whether there's ambiguity requiring a cross-examination, but finds that the lack of opportunity to cross-examine would go to weight, not admissibility.

I have my doubts about that.  In judicial proceedings, there are only certain contexts (such as motions) in which affidavit evidence is admissible standing alone, and generally that does come coupled with an opportunity to cross-examine.  (I might lead your affidavit to show that you admitted a fact I want in.  I might lead an affidavit of your witness if it has a prior inconsistent statement, to impeach his credibility.  But if I try to lead an affidavit of a third-party witness for the truth of its contents in a trial, I should generally be producing the witness in person instead, to be subject to cross-examination.)  Affidavits are witness evidence, and without an opportunity to cross-examine on an affidavit there's an abrogation of natural justice.  While the standards for admissibility are somewhat relaxed in administrative tribunals, it wouldn't generally be an error in law to reject evidence which would be inadmissible in courts.

Particularly in light of the different purpose for which the affidavit was prepared, it wouldn't be surprising or improper if the affidavit itself wasn't comprehensive for the purposes of the instant litigation - i.e. that, for the sake of the matrimonial litigation, it was a complete and truthful account, yet it nonetheless omitted details which - while not relevant to the matrimonial issues and therefore properly omitted - would substantially change its interpretation in respect of the employment litigation against VIH.

Justice Zinn found that the adjudicator had erred in law by excluding the affidavits.

The Estoppel Issue

This is unusual.  Not a surprising argument, from a lawyer's perspective, but nonetheless unusual.

Promissory estoppel is an equitable doctrine which, to put it a little too simply, says that if I promise you (by words or conduct) that I won't stand on my legal rights, and you act in reliance on that promise, I can't hold it against you.

There's a query you sometimes see from employers, trying to set up an "independent contractor" relationship:  "Why can't we just get the worker to promise not to come after us for failing to comply with employment standards, and to cover his or her own taxes, EI, and CPP?"

The simplest way of looking at the reason is this:  You can't contract out of employment standards minimums (this is true under the CLC as well as the Provincial ESA, though for slightly different reasons).  For employees, an attempt to say, "You get less than minimum wage" is void, by operation of statute, and trying to say "You're not an employee" is not a workaround.  If you're an employee, by operation of law, you have certain statutory entitlements, and there's no ritual contract-signing which will protect an employer from them.

But even then, it still seems strange that the parties can carry on a relationship for years as an 'independent contractor' relationship, and then suddenly when the employer goes to terminate the relationship, the employee starts claiming that the employer should have made EI contributions, and now owes pay in lieu of notice.  So, as I said, it isn't surprising that a lawyer would argue 'estoppel' at some point.  I have never seen it argued before, however, and there are good reasons why estoppel cannot apply in this context.

What does the employer seek to block by the estoppel argument?  What is the origin of the legal rights Rennie is seeking to assert, which VIH is saying should not be asserted?  The answer is this:  Part III of the Canada Labour Code.  There's some fairly solid jurisprudence in the labour law context (think: unions) that estoppel cannot block the operation of a public statute.  If that same principle applies here, and there's good reason to believe that it would, then the estoppel argument is dead in the water already.

Indeed, one might argue that the provisions in the CLC which prevent parties from contracting out of their obligations would also bar the operation of estoppel.

Along similar lines, though, one can look at specifically how the worker has supposedly promised not to take the position that he is an employee, and the answer is simply this:  He acted in accordance with a contract that said that he isn't an employee.  And conversely, the payor's only reliance - a necessary element for estoppel - is through its acting in accordance with the same contract.  Looked at in that light, it is completely incoherent to regard the matter as one of estoppel:  It's contract law, plain and simple.  The promise was the agreement.  The CLC expressly overrides that promise - it would make no sense to suggest that a contractual promise which is barred by operation of statute can be successful if framed as an estoppel instead.

In other words, I seriously doubt that estoppel properly applies to these circumstances at all.  And for the reasons I noted earlier, the affidavits absolutely cannot be relevant to an estoppel argument.

The Bottom Line

Justice Zinn merely sent the case back down to the adjudicator - the proper remedy on a successful judicial review.  But if the estoppel argument succeeds, that's troubling.

Most faux 'independent contractors' have little choice but to accept the designation.  In order to get paid, they have to invoice, including GST.  They then have to represent themselves to the CRA as self-employed (otherwise why are they collecting and remitting GST?).  And the vast majority of them have no idea that there's anything irregular or illegal about the arrangement until (a) they get assessed by the CRA or (b) they get fired and go talk to a lawyer about it.

There's a reason that you can't contract out of employment standards - it's a protection of vulnerable employees, and it applies across the board.  To suggest that an employee, who often doesn't know any better, can prejudice those guaranteed statutory rights by acquiescing to the terms of the very concerning.


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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