Tuesday, September 23, 2014

Ford v. Keegan: Dependent Contractors, Fiduciary Duties, Restrictive Covenants, and More

The Superior Court of Justice released a decision last month in the case of Ford v. Keegan:  Ford is a safety consulting firm, and had retained Mr. Keegan to provide safety training to its customers.  After Ford terminated the relationship, Mr. Keegan continued to provide such services to Ford's customers and former customers, and Ford sued Keegan to enforce the terms of a non-competition clause.

Keegan counterclaimed in wrongful dismissal.

It's an interesting case, if a lengthy read, covering a number of the more nuanced issues in employment law:  Was Mr. Keegan an employee or an independent contractor?  Is the termination language in the agreement enforceable?  Are the restrictive covenants enforceable?  Was he a fiduciary of Ford?  What is the impact of Keegan's subsequent bankruptcy?

Ultimately, the court determined that Mr. Keegan was not an employee, but rather fell within the 'intermediate category' of a dependent contractor.  The agreement entitled Keegan to 30 days notice of termination, which Ford had provided - the agreement was enforceable and the wrongful dismissal counterclaim was dismissed.  As for the restrictive covenants, they were found to be void, but Keegan was nonetheless found to have breached fiduciary duties owed to Ford, and his resulting liabilities survived the bankruptcy.

So yes, a lot of ground to cover, and I'm going to deal with them in an unusual order, because I think some of the court's conclusions have more impact than others - in particular, I'm struck by the court's assessment of the written contract, because Justice Price expressly declined to follow a persuasive line of cases on the point, dealing with what I call 'formulaic non-compliance'.

The Contractual Termination Clause

The contract contained a term entitling either party to terminate the contract on 30 days' notice.  In an employment contract, this would be problematic, because the Employment Standards Act, 2000 guarantees employees with more than 5 years of service more notice than that.  The established wisdom, up until now, was that such a clause, in an employment contract, would be void ab initio - i.e. it would constitute an unlawful attempt to contract out of the terms of the ESA, and thus be voided, regardless of whether or not it satisfied the employee's actual statutory entitlements at the eventual point of termination.  This conclusion was first reached by the BC Court of Appeal 1998 in Shore v. Ladner Downs, and followed by the Ontario Superior Court in 2011 in Wright v. The Young & Rubicam Group of Companies.  (See my discussion of Wright here.)

Thus, Keegan took the position that the termination clause did not comply with the Employment Standards Act, 2000, even though he did receive more than the minimum notice under the ESA (he'd only been in the job for a little over three years, entitling him to three weeks).

I must remark that I consider the judge's finding that Keegan was not an employee to be a full answer to this submission:  The ESA simply does not apply to independent contractors, and probably not to dependent contractors either.  However, Justice Price instead found that the termination clause "did not violate" the ESA under the circumstances.

The judge referenced Shore v. Ladner Downs, then the Wright case, but declined to follow them:
I respectfully disagree with Low J.’s reasoning in Wright. An employer who prescribes a notice period in a contract of employment must conform to provincial employment standards legislation for the particular employee, in the particular circumstances.  The employer who drafts an agreement prescribing a fixed notice period, rather than one that increases with the employee’s years of service, and who does not negotiate a new employment agreement when the employee’s years of service entitles him/her to a longer period of notice, assumes the risk that the clause will become invalid at that point and that the common law will prevail to determine the period of notice required. It is only invalid at that point and not invalidated from when the contract was initially executed.
I would like to be able to call this obiter, to say that the issue was disposed of by the finding that Keegan was a contractor, but the reality is that I can find no support for that proposition within the text of the decision itself.  As a result, the decision stands both for the highly dubious proposition that dependent contractor relationships are governed by the Employment Standards Act, and also directly creates a schism in the law as to the impact of the ESA on non-compliant formulas.  Until the question is resolved by an appellate court, this will result in significant uncertainty in the law.

(I also have to say that the Shore v. Ladner Downs approach simply made sense to me, as well:  Section 5 of the ESA expressly provides that any attempt to contract out of an employment standard is void - it really is a question of contractual interpretation, of whether or not the language itself is compliant with the ESA.)

Employee versus Independent Contractor

This is an issue I see arise with surprising frequency.  Many parties choose to characterize their relationship as that of an independent contractor.  For the payor, it relieves them of obligations under various employment statutes, including employer contributions to EI and CPP.  For the payee (i.e. the worker), it can have tax advantages - you get to write off expenses.

That said, I've seen a good many cases where workers were sold on the 'you get to deduct your expenses' pitch where there are no legitimate expenses to deduct from your taxes - at least, none the CRA would accept.  This is often the case for the particularly superficial 'independent contractor' designations.

This case was not a superficial attempt to mask an obvious employment relationship with an independent contractor designation.  Keegan had a lot of autonomy in terms of his work, and while he had to comply with Ford's pricing guidelines, the compensation was all a function of his billing.  Keegan was not 'controlled' in the sense that would normally indicate an employer/employee relationship.  While Ford had its own promotional material, Keegan directed where to promote his services.

The strongest indicator of an employment relationship, in this case, was the exclusivity of Keegan's relationship with Ford - not only did he not have business or clients outside of that relationship, but he was unable to do so as a term of the contract.  Justice Price identifies this factor as not being determinative, however - that's probably correct (though I would consider contractual exclusivity deserving of a great deal of weight).  In light of all the other factors, it was not enough to make Keegan an employee.  However, it also created a degree of economic dependence inconsistent with an independent contractor relationship, with the impact that Keegan was deemed to be a 'dependent contractor'.

Restrictive Covenants

The contract included a sweeping restrictive covenant preventing Keegan from providing training to any of Ford's customers for two years, in a territory that covered almost all urban areas in Ontario and Quebec, among others.

The problem with this, the court found, is that Keegan did not have access to a list of Ford's customers.  This made the agreement ambiguous and overbroad, effectively preventing Keegan from offering services to any company which could possibly have been Ford's customer.  That rendered the restrictive covenant unenforceable.

And a court can't generally fix a restrictive covenant.  You can't just interpret it down to something that would be acceptable.

That's pretty well-grounded in the case law.  What's less grounded in the established jurisprudence, however, is where the court went from there.

Fiduciary Duties

"Key employees" can owe fiduciary obligations to their employers - i.e. an obligation to put the employer's needs ahead of their own, including an obligation not to compete unfairly after the end of the employment relationship.

Most often, fiduciary duties are reserved to senior management - people in a position to know and direct the company's activities at a high level.  However, there are cases where more junior individuals who act as the 'face of the company' are found to have fiduciary duties, as a result of the exclusive relationships they develop with clients of the business.  It's a complex area of law, and Justice Price includes a good summary of it from paragraphs 168-179.

Going into the application to the case, however, there are some problems in the analysis.  Not only does Justice Price allow a lot of 'restrictive covenant' cases to influence the analysis of whether or not a fiduciary duty exists, but he misstates the conclusions of a number of cases he relies upon - for example, in at least two of the cases where he states that employees were found to owe fiduciary duties, the contexts were of motions for interlocutory injunctions:  The courts in those cases were not called upon to provide an answer to whether or not a fiduciary duty exists, and did not do so, but rather found (at best) that there was a legitimate argument to be made on the point.

There has been a movement in some quarters (including the New Brunswick Court of Appeal) to scale back the application of fiduciary duties owed by lower-level employees; Justice Price rejected that approach, however, and concluded that, when Ford provided Keegan with a list of customers, it put itself in a position of vulnerability - thus, Keegan owed a fiduciary duty not to unfairly compete using the customer list provided by Ford, and breached that duty.

Respectfully, I think we're looking at two distinct issues here:  A fiduciary duty doesn't arise by virtue of possession of the list.  A fiduciary duty, in this context, can only arise as a result of the nature of the relationship between the customers and the employee.  The list can come tied to other obligations of a non-fiduciary nature - if it's confidential and proprietary (and it probably is), then using the list may amount to a misappropriation of Ford's data.

But there's even more strangeness when looking at the nature of the fiduciary duty, because Justice Price looks to the restrictive covenant, which "while ambiguous and over-broad, and therefore unenforceable as such, is evidence from which I infer that the parties agreed that prohibiting Mr. Keegan from providing training to his customers at Training Services for a period of two years after the termination of the Agreement was reasonable and necessary to protect Training Services from the vulnerable position which it created for itself when it entered into the Agreement."

Justice Price therefore concluded that Keegan was restricted, for a period of two years, from providing services to customers on Ford's list within the geographical zone set out in the restrictive covenant.

In other words, having found that the restrictive covenant was unenforceable because it was ambiguous and overbroad, a defect which the court could not cure, Justice Price used the fiduciary doctrine to resurrect and repair it.

Further Commentary

I'm fairly troubled by the overall conclusions here.  It seems entirely plausible that Keegan violated proprietary interests of Ford, and can be held liable for that...but the finding of a fiduciary duty seems very strained, as do the conclusions regarding the contents of the fiduciary duty.

Indeed, it's not clear to me at all that it's appropriate to hold a dependent contractor to post-employment fiduciary duties in the first place.  He wasn't an employee at all, and yet he satisfies the test for a 'key employee'?  Definitely an element of having your cake and eating it too.

What's particularly alarming, though, is that there's nothing particularly unusual about the case, as 'unenforceable restrictive covenant' cases go - the employee goes off and competes, employer tries to enforce the restrictive covenant, fails because the restrictive covenant was framed too broadly.  It happens all the time, and in all of these cases there's a vulnerability of the employer to the employee (or else the restrictive covenant would have failed for other reasons, too).  If Justice Price's approach - cure the vulnerability with a fiduciary duty, and read the contents of the unenforceable restrictive covenant into that duty - were correct, that would be the resolution of all such cases, with the result that employers don't need to worry about ambiguity and overbreadth of their restrictive covenants.  It's hard to reconcile with the established jurisprudence from the Supreme Court of Canada.  Not to mention that looking to unenforceable terms as evidence of the intentions of the parties is pretty close to the exact reasoning the SCC rejected in the Machtinger case.

I'll let the bankruptcy lawyers weigh in on whether or not the finding that Keegan's liabilities survive bankruptcy is consistent with the objectives of the BIA.


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.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

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