Governance issues involving contractors and employees

October 25, 2022 | Sarah Fitzpatrick, Geoff Mason

A recent Alberta case highlights the governance issues boards can find themselves facing when overseeing their employees and contractors, and the tricky distinction between independent contractors and employees.

In Gerling v. Camrose Regional Exhibition & Agricultural Society, 2022 ABCA 210, the Camrose Regional Exhibition & Agricultural Society (the “Society”) entered into a management services contract with Papa-T Productions Ltd. (the “Consultant Company”). Under the management services contract, the Consultant Company provided the Society with various management services, including the services of its sole director, shareholder and employee, Mr. Gerling, who served as the chief executive officer of the Society.

The parties had a long history: Mr. Gerling had been involved in the Society for approximately 25 years. However, after certain incidents involving Mr. Gerling which caused third parties to complain to the Society’s board, the Society decided to terminate the management services contract with the Consultant Company for cause.

At trial, the judge found that Mr. Gerling was an employee of the Society and not an independent contractor. The judge further found that Mr. Gerling’s actions, while they included misconduct, did not amount to actions sufficient to terminate a long-term employee and, as a result, he was wrongfully dismissed. The judge also found that the Society could only terminate the management services contract if the Consultant Company had committed a “material significant breach” of the contract, which means that the breach must be substantial and go to the root of the contract. In this case, the particular misconduct (retracting a retired employee’s invitation to a music festival organized by the Society based on allegations about that individual’s conduct) did not go to the root of the management services contract, and as a result, was not a material significant breach.

On appeal, the Court of Appeal of Alberta found that the trial judge erred in finding that Mr. Gerling was an employee of the Society. The management services contract had been structured so that Mr. Gerling was engaged as an independent contractor and his services were provided by the Consultant Company to the Society. However, the Court upheld the finding that the Society breached the management services contract when it terminated the contract on the basis that the conduct at issue was not a material breach.

In the decision, the board of the Society was described as a non-operational governance board. The directors would not have been involved in the day-to-day affairs of the Society, making their decisions based on the information reported to them by the individuals who the Society employed or had contracted and by third parties who made complaints directly to the board. It can be challenging generally for non-profits to properly respond to complaints made about their employees and contractors, but it is particularly challenging when those complaints are being made about the most senior individual in the organization (i.e. the executive director or chief executive officer).

Even though they are almost always volunteers, the directors of non-profits have the same fiduciary duties as any other director to oversee the management of the organization. From a good governance perspective, it is important that non-profits have in place proper channels of communication so that the board is informed about the activities being carried out by their employees and contractors. There needs to be consistent flow of information being provided by the most senior employee or contractor to the board. Normally, this line of communication is between the executive director or chief executive officer and the chair of the board. The nature of that information would depend on the size and operations of the non-profit. For example, for a small non-profit it would be appropriate for the chair to be kept informed of all employee-related issues. However, for a larger organization where there are more internal checks and balances, the chair does not necessarily need to be kept informed of all employee-related matters.

It is also important to have alternative lines of communication, where others can bring information to the chair. This is particularly important when there is an issue involving the executive director or chief executive officer: other employees or contractors need to have the ability to raise concerns, whether this is directly with the chair or to an internal person who is designated for dealing with those types of issues.

Putting in place policies that deal with lines of communication and how to handle complaints better prepares non-profit organizations and provides tools at their disposal for when issues arise. Such policies can also provide a stronger legal basis for taking action in response to a complaint, including discipline or termination. Further, whether the complaints are made about employees or contractors, there should also be processes in place to investigate those complaints in order to determine whether any misconduct has occurred and what steps should be taken as a result. In many cases, organizations may even be legally required to implement policies and procedures for receiving and responding to internal complaints.

Finally, as this case illustrates, the distinction between when someone is acting as an independent contractor or as an employee can be difficult to navigate. Multiple factors would have tended to suggest that, as was found at trial, Mr. Gerling was an employee of the Society, including Mr. Gerling’s long tenure and high level of authority and integration with the Society, and the provision of office space, secretarial services and a fixed salary to Mr. Gerling, amongst others. In finding that Mr. Gerling was an independent contractor and not an employee, the Court of Appeal relied heavily on the parties’ stated intentions in the management services contract, which may appear as welcome news to those looking to form independent contractor relationships, but is not an approach commonly taken by courts and does not promote certainty in this area of the law.

Generally speaking, terminating an employment relationship without notice presents far greater liability risks than terminating an independent contractor relationship without notice. If a person is an independent contractor, whether the organization can terminate their services contract will largely depend on the terms of the contract itself. Conversely, employees may be entitled to certain common law employment rights on termination, to the extent that their contract has not dealt with those rights, which can give rise to more serious consequences if the organization is found to have wrongfully terminated them. As we can see, there can be a lot riding on this distinction.

If you have questions about your policies or employment and contractor agreements, Miller Thomson’s Social Impact Group and Labour & Employment Group would be happy to assist.

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