Dependent Contractors and Employees Should Get Same Severance Pay

A recent court decision ruled that dependent contractors should get the same amount of notice of termination or payment in lieu of notice (often called severance or a severance package) as employees.

Most workers can be classified into two types of categories: employees or independent contractors. Independent contractors receive less protections under the law compared to employees. One main difference is that independent contractors are not entitled to notice of termination under the common law or the Employment Standards Act. Employers who hire independent contractors can dismiss these contractors by providing the notice that is stated in the contract.

Many employers hire independent contractors when they are truly employees. They do this because it offers employers more flexibility in managing their workforce. Some workers like to be independent contractors as they can potentially make more money.

The Dependent Contractor

There is an intermediate category between independent contractor and employee - the dependent contractor. Dependent contractors are contractors who are entitled to notice of termination at common law because they are dependent on the employer they are working for.

In Liebreich v Farmers of North America, 2019 BCSC 1074, the Court found that a worker who worked for a company for 14 years was a dependent contractor because of the following factors:

  1. Control: The company directed the worker’s activities including setting Key Performance Indicators (KPIs); could select or not select her for work; reimbursed the worker for her travel expenses; paid her wages including vacation pay and banked overtime; and she could not refuse directions from the company.

    This factor favoured an employment relationship

  2. Ownership of Equipment: The company provided the worker with only a cellphone. The worker provided her own laptop.

    This factor was neutral

  3. Profit/Loss of Opportunity: The worker did not benefit from the success of the company. She did not share any risks with the company, or liable for the consequences of the company’s financial failures.

    This factor favoured an employment relationship.

  4. Business Integration: The worker’s business cards and email signature showed she was part of the company’s senior management team. She was also part of the team for 14 years.

    This factor favoured an employment relationship.

From these four factors, the court determined the employee was a dependent contractor.

Dependent Contractors Should Get Same Severance as Employees

When it came time to determine how much severance pay the worker should receive despite being dependent contractor, the court stated that calculating the severance for dependent contractors should be the same as calculating the severance for true employees.

Based on the worker’s age (49), length of service (14 years), character of work (senior management), and availability of similar work (few), the court awarded the worker 15 months of pay for severance. The Court calculated the employee’s severance using the same way as this severance pay calculator.

Employee Education

Being an independent contractor has its perks, including being self-employed, earning a higher base salary, and writing off business expenses. However, these workers miss out on other things, including employment insurance (EI) contributions, CPP contributions from an employer, vacation pay, and most importantly: entitlement to a severance package upon termination. Even if a worker agrees to be an independent contractor at the beginning, they may be an employee or a dependent contractor at the end. Consulting an employment lawyer will help a worker understand what their rights are.

Employer Errors

Having independent contractors are great - less responsibility and more flexibility. Even if one or two workers are misclassified as independent contractors, it may not seem like a big problem because the company can just provide them their severance package upon termination. However, this problem can be magnified significantly when employers have a large contingent of independent contractors who may be misclassified. In this case, the company will exposed to various liabilities, including accrued vacation pay. Risks and costs can be lowered if the contracts provided to these independent contractors are drafted appropriately.

If you are an employer or employee who has questions about workplace issues such as worker classifications of employees, dependent contractors, and independent contractors, please contact Toronto employment lawyer Jason Wong at 647-242-5961 or jason@wongemploymentlaw.com