Drivers Inc: Classification issues in transportation

December 8, 2020 | Michael Cleveland, Lisa Goodfellow

Introduction

Proper classification of drivers is an ongoing issue. The way drivers are classified can significantly impact the obligations and operations of a business, as independent contractors are excluded from most employment standards and labour relations legislation both federally and provincially, although dependent contractors can be captured for certain purposes. This article provides a brief summary of key aspects of the Canadian approach to worker classification, and explores how companies can limit their liability on termination, regardless of how workers are ultimately classified.

1. The language used in a contract does not determine a worker’s status.

Written contracts are useful in setting out the parties’ expectations regarding the existence of an employment or independent contractor relationship, but they do not tell the whole story. The fact that someone is labeled an independent contractor or an employee does not mean that they are one. Instead, as was identified by the Supreme Court of Canada in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., the central question is “whether the person who has been engaged to perform the services is performing them as a person in business on his own account.”[1] Key considerations in conducting this analysis include:

  • Control: The greater the degree of control exercised by the business over the worker’s activities and the manner in which they perform work, the more likely that an employment relationship exists.
  • Equipment: Where the worker provides his or her own equipment, this will be indicative of an independent contractor relationship.
  • Subcontracting: If the worker is permitted to hire his or her own helpers or can subcontract work to others, this will be indicative of an independent contractor relationship.
  • Chance of Profit/Loss: If the worker assumes a chance of profit and risk of loss, this indicates an independent contractor relationship. The core of this inquiry is whether the worker has his or her own business separate from the work performed for the company.

This is a non-exhaustive list, and additional factors may be considered by a court in classifying a worker. The key takeaway is that courts will look beyond the language used by the parties and will inquire into the substance of the relationship.  The degree of control exercised over the work, and the degree of integration of the worker and their work in the business, will ultimately be determining factors.

2. Placing a corporation between a worker and the business is not determinative of status.

The recent case of 2374432 Ontario Inc. v. Singh addressed a misconception often held by those in the transportation industry—specifically, that interposing a company between a business and a worker will automatically create a subcontractor relationship rather than an employment relationship.[2] The decision provides:

The Appellant (like many employers in this industry) believes that since it paid a personal corporation an agreed-upon sum for Mr. Singh’s driving services along with HST, the Appellant is not required to provide the minimum employment standards because Mr. Singh is not its “employee” but rather is an employee of the personal corporation which is an “independent contractor” to the Appellant…While it is understandable that the Appellant might believe the Respondent’s acceptance of payment through a personal corporation is sufficient to make him an independent contractor, this is a trap for the unwary employer as the settled jurisprudence on the matter is to the contrary. [3]

An application of the Sagaz Industries factors led to the conclusion that the worker was an employee, despite the fact that the driver had incorporated an entity to enter into the contract:

  • Control: Virtually all aspects of the driver’s work were controlled by the business, including the rate of pay and the number of trips given to the worker. The driver could not decline any trips offered. A specific truck was assigned to the driver, and the driver had no customers of his own. The driver was required to report his daily activities to the business via the company’s log books.
  • Equipment: All of the tools, including the tractor-trailer, were owned by the business. The business paid all of the operating expenses for the commercial use of the vehicle. The AZ license held by the driver was a qualification, not a tool.
  • Chance of Profit / Risk of Loss: The driver had no opportunity to make profit from his work aside from earning wages for his driving services. He was paid a flat rate regardless of whether the business made or lost money on the trip.

Moreover, the driver only drove for the business, and the general public would have identified the driver and the rig as belonging to the business. Thus, the driver was an employee of the business, regardless of the fact that he received his wages through a numbered company.

3. Be wary of the “dependent contractor” classification.

Canadian law has established a somewhat unique concept of a “dependent contractor,” an intermediate classification, where the worker qualifies as self-employed for tax purposes, but is financially dependent on one company for all or most of their revenue. This classification is relevant for two reasons. First, in the labour relations context, dependent contractors are entitled to unionize, while independent contractors are not. Second, in the employment law context, dependent contractors, like employees, may be entitled to reasonable notice of termination at common law.

In Ontario, a two-step test exists for determining whether a worker is a dependent contractor entitled to reasonable notice of termination. The first step is to determine whether a worker is a contractor or an employee.  For this analysis, the above considerations from Sagaz Industries govern.[4]  If the worker is determined to be an employee, the analysis ends. If the worker is found to be a contractor, then the court will “determine whether the contractor is independent or dependent.” Here, a worker’s exclusivity in working for the company is determinative, as it demonstrates economic dependence.[5]

Recent appellate court cases have clarified that a determination of economic dependence must consider the full history of the relationship, rather than a “snapshot” approach.[6] If, when looking at the full scope of the parties’ relationship, the worker in question usually worked exclusively for the company, and a “substantial majority” of their work remained with the company even when they provided some services to a competitor, they will likely be considered to be a dependent contractor.[7] Secondly, a dependent contractor relationship requires that there be a “minimum economic dependency” which amounts to “near-complete exclusivity.”[8] If the company is simply an “important client” of the worker, then the requisite “enduring dependency” will not be found.[9]

As with employees, a dependent contractor’s entitlement to reasonable notice of termination at common law can be limited by an express termination clause in a written agreement between the parties. This strategy to limit liability on termination is discussed in more detail below.

4. Occupational health and safety and worker’s compensation legislation will be broadly applied.

Regardless of whether workers are classified as employees or dependent/independent contractors, employers will be required to follow the requirements set out by applicable health and safety legislation. For example, Ontario’s Occupational Health and Safety Act applies to all “workers”, a broader term than “employee”. In Ontario (Labour) v. United Independent Operators Limited, the Ontario Court of Appeal held that the legislative requirement for companies with 20 or more “regularly employed” workers to establish a joint health and safety committee extended to companies which engage independent contractors.[10] In that case, the company had 11 employees at its office and between 30 and 140 truck drivers who worked as independent contractors. The Court held that interpreting the words “regularly employed” narrowly so as to exclude the contractors would undermine the purpose of the legislation, namely, the promotion of worker safety.[11] Thus, companies’ obligations under occupational health and safety legislation will apply regardless of how they choose to engage workers.

Ontario’s Workplace Safety and Insurance Board (WSIB) has published a questionnaire to assist with the determination of whether drivers will be treated as independent operators for workplace safety and insurance purposes only. This will determine whether a company must pay premiums to the WSIB in respect of an individual because they are a “worker”, or whether the individual is an “independent operator” who is not subject to mandatory coverage, but may obtain optional insurance at their own expense. An owner-operator will be considered an independent operator rather than a worker only if they meet all of the  following criteria:

  1. The owner-operator pays for the truck and a majority of the equipment or other related expenses (such as fuel, maintenance, licence and storage), and is not required to finance the truck and equipment/related property through company sources.
  2. The owner-operator has the right to exercise choice in selecting and operating the vehicle, and has market mobility in that he/she has discretion to enter into contracts of any duration to transport goods and maximize profits.
  3. The principal of the company does not have the right to control where or from whom products/services are purchased by the owner-operator (although this does not preclude the owner-operator from exercising his/her option to purchase products/services from the company). Also, the principal does not have the right to exercise control over the owner-operator’s operations except to the extent that loads are offered, and destinations and delivery schedules are established by the principal’s contract with the shipper and except for the joint responsibilities set out in federal and provincial licensing and related statutes.
  4. The principal and the owner-operator state that the relationship is one of a contract for service and not that of employer and employee.
  5. The company does not issue a T4, T4A or make statutory deductions and remittances for EI and/or CPP.

If any of these criteria are not met, the owner-operator will be considered a worker covered by the principal’s WSIB account, their income is included in the assessable payroll of the principal, and they are entitled to WSIB. Different criteria may apply in other jurisdictions.

5. Regardless of classification, well-drafted contracts are critical.

There are steps that businesses can take in order to limit their potential liability on termination, regardless of how the worker is ultimately classified. The most important step is having a written agreement signed by the parties at the outset of the relationship with a valid termination provision–one that will not run afoul of employment standards minimums in the event the driver is later found to be an employee. Businesses that retain independent contractors but are concerned about the potential fallout of a ruling that the contractor was misclassified should ensure that the termination clause would never provide less than the minimum notice period required by the relevant employment standards legislation. If this is done, then regardless of the worker’s ultimate classification, the termination clause should limit the company’s liability on termination to the minimum permitted by law.  If they are found to be dependent contractors, this same termination clause will limit the notice obligation to that amount, rather than having an obligation to provide reasonable notice implied—which is typically far more than the statutory minimums for employees.

Where workers move between independent contractor and employee status while working for the same business, the time that they spend as an independent contractor could be relevant to their entitlements on termination. Courts may consider the years that a worker spent as an independent contractor where they are found to be an employee at the time of termination.[12]

Businesses should also be wary of the practice of retaining employees or independent contractors on a fixed-term contract, without providing for a right to earlier termination, or a clause requiring the worker to mitigate their damages. Courts have ruled that, if the parties to a fixed term employment contract do not specify a right to terminate earlier, an employee is entitled on early termination to amounts they would have earned for the remainder of the term.[13] As a result, an employer may required to pay the employee damages equal to all amounts  that would have been earned to the end of the fixed term contract, without any reduction for amounts earned by the worker from other sources during that period.

We encourage you to contact a member of Miller Thomson’s National Labour & Employment team or Transportation & Logistics team if you have any questions regarding the above.


[1] 2001 SCC 59 [“Sagaz Industries”], at para 47.

[2] 2017 CanLII 63343 (CA LA).

[3] Ibid., at paras 3 and 17.

[4] McKee v. Reid’s Heritage Homes Ltd , 2009 ONCA 916.

[5] Ibid.

[6] Keenan v. Canac Kitchens Ltd., 2016 ONCA 79, at para 25.

[7] Ibid., at para 26.

[8] Thurston v. Ontario (Children’s Lawyer), 2019 ONCA 640, at para 23.

[9] Ibid., at para 32.

[10] 2011 ONCA 33.

[11] Ibid., at para 64.

[12] Cormier v. 1772887 Ontario Limited c.o.b. as St. Joseph Communications, 2019 ONSC 587.

[13] Ibid., at para 22.

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