It is a common misconception that employees receive severance whereas those who are characterized as contractors don’t.
Instead, the law is actually as follows: employees and “dependent contractors” are entitled to severance whereas “independent contractors” are not.
Further, if you are one of those people who believed the misconception, and did not immediately bring a claim, all may not be lost: workers have two years from the date of their termination to bring a lawsuit.
This article will begin by explaining what severance actually is and will then expand on the above principles in more detail.
EMPLOYEE ENTITLEMENT TO SEVERANCE
Employment agreements include an implied term requiring employers to give employees reasonable notice of termination. While employers can replace this implied term with an express provision reducing or even eliminating an employee’s entitlement to reasonable notice, such provision must satisfy certain requirements to be enforceable, including limiting language that’s clear and unambiguous.
Absent an enforceable and express provision, courts determine an employee’s reasonable notice period based on various factors such as age, length of service, and character of employment—with the rough high end being around 24 months for long service employees.
However, in practice, most employers, for business reasons, terminate employees effective immediately without providing them with notice at all. When this happens, the employer has breached the implied term of reasonable notice and is liable to the employee for the damage that results. This damage is typically everything the employee would have earned had reasonable notice been given. These damages are also called pay in lieu of reasonable notice or severance.
THE FIRST INQUIRY: IS A WORKER, WHO HAS BEEN CHARACTERISED AS A CONTRACTOR, ACTUALLY AN EMPLOYEE?
Whether a worker is an employee, and therefore entitled to severance, is often a non-issue. However, parties do disagree on a workers’ status in certain circumstances—particularly where the worker believes that their contractor status was merely a label their employer/client gave to them to escape certain obligations including provisions of the Employment Standards Code1 like overtime, vacation pay, and restrictions on hours of work. When such a disagreement happens, the initial inquiry is as follows: was the worker a true “employee” or were they actually a “contractor”?
While Courts will consider how the parties viewed their relationship as well as any written evidence to that effect, this does not end the inquiry. Instead, courts consider a non-exhaustive list of factors, including whether the:
- the employer had a level of control over the worker’s activities;
- the worker provided their own equipment;
- the worker could hire his or her own helpers;
- the worker had a degree of financial risk;
- the worker worked exclusively for the employer; and
- the worker had an opportunity for profit in the performance of their tasks.
What these factors do, is help the court answer the following question: was the worker in business on their own account? If they were, then they are a contractor and not an employee (and vice versa).
For example, in one Saskatchewan case, the plaintiff signed a contract (upon his hiring) that described him as a contractor. However, this description didn’t conform to reality based on the fact that the:
- plaintiff was required to devote all of his time to the defendant;
- defendant controlled the plaintiff through a manager including his hours of work and when he travelled; and
- plaintiff took no risk, and beyond his salary, had no opportunity for profit.
The result was that the Court found the plaintiff to be an employee and awarded him severance.
In contrast, unlike the above case, a court may find a worker to be a true contractor where they pay the defendant rent for their office space and materials and subcontract some of the work to someone else.
THE SECOND INQUIRY: IN THE EVENT THAT THE WORKER IS A CONTRACTOR, THE QUESTION THEN BECOMES WHETHER THEY WERE “DEPENDENT” OR “INDEPENDENT”
In the event that a court finds a person to be a contractor, the inquiry is not over. Instead, the question becomes as follows: was the contractor economically dependent on a certain client?2 If they were, then they too will be entitled to reasonable notice/severance. Courts have referred to these types of workers as falling into the intermediate category of “dependent contractor”. The Ontario Court of Appeal3 explained this category as follows:
I conclude that an intermediate category exists, which consists, at least, of those non-employment work relationships that exhibit a certain minimum economic dependency, which may be demonstrated by complete or near-complete exclusivity. Workers in this category are known as “dependent contractors” and they are owed reasonable notice upon termination.
For example, in Keenan v Canac Kitchens4, Lawrence and Marilyn Keenan were originally employees of Canac Kitchens (Canac), beginning in 1976 and 1983 respectively until Canac unilaterally changed their status to that of a contractor in 1987 until their termination in 2009.
The issue before the Court was whether Mr. and Mrs. Keenan was dependent contractors, rather than independent ones, such that they would be entitled to severance.5 Ultimately, the Court held that they were, and awarded them each 26 months severance, with the former determination based largely on the fact that they:
- both worked exclusively for Canac until 2007; and
- while they thereafter completed some work for a competitor due to a slow down in work, the majority of their income still came from Canac. Specifically: 80% in 2007; 66.4% in 2008; and 72.6% in 2009.
Other cases where courts have awarded severance to dependent contractors include:
- Phillips v Jakin engineering & Construction Ltd.6, where the Court awarded a project manager on a construction project 4 months severance after only 3 months service; and
- Weber v. Coco Homes Inc.7, where the Court awarded a real estate agent 2 months notice after 2 years and 3 months service.
To summarize the above, employees are entitled to severance and so are contractors who are economically dependent on one client. In other words, it is only those contractors who are truly independent that are not entitled to severance.
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1 RSA 2000 c E-9.
2 This will be the case when the contractor works for that client exclusively or near exclusively.
3 McKee v Reid’s Heritage Homes Ltd., 2009 ONCA 916.
4 2015 ONSC 1055; Appeal dismissed: 2016 ONCA 79
5 Counsel for both parties agreed, by the end of the trial, that the plaintiffs were contractors, and so the initial inquiry of whether they were employees or contractors was absent from the Court’s decision.
6 2012 BCSC 2066.
7 2013 ABQB 180.