In its recent decision in McKee v. Reid’s Heritage Homes Ltd., the Ontario Court of Appeal has confirmed that Ontario law recognizes “dependent contractor” as an intermediate status between employee and independent contractor, and that dependent contractors are entitled to reasonable notice of termination.

The plaintiff was Elizabeth McKee, who in 1987 entered into an agreement with Reid’s Heritage Homes Ltd. to sell houses. The agreement, which McKee signed on behalf of her operating business, provided that Reid’s would supply 69 homes for her to advertise and sell in exchange for a fee for each home sold. The agreement prohibited McKee from providing services to any company that was not controlled by Reid’s. The agreement also provided for termination by either party for any reason on 30 days’ notice.

After McKee sold the first 69 homes, Reid’s continued to provide homes for her to sell. McKee stayed very busy with work for Reid’s and over time, without Reid’s involvement, hired, trained, and managed her own subagents with whom she split sales commissions. The relationship continued in this way until 2005, when Reid’s told McKee that she and her subagents would have to work for Reid’s as “direct employees”. McKee declined employment on the terms offered by Reid’s and sued for wrongful dismissal.

The trial judge held that the original 1987 agreement was “spent” after the sale of the initial 69 homes, so the 30 day termination clause did not survive to govern McKee’s termination 18 years later. The trial judge found that although the agreement was spent, the parties had, through their continued practice and business relationship, implicitly agreed that McKee would continue to work exclusively for Reid’s and that Reid’s would continue to pay to sell homes. The trial judge found that at the time of termination, McKee was an employee and not an independent or even a dependent contractor, as her activities selling houses was an integral part of Reid’s business. Having found that McKee was an employee, the trial judge decided that based on her position, years of service, her age (64), and the limited opportunities available to her, she was entitled to 18 months’ severance in lieu of notice.

The first issue for the Court of Appeal was whether to uphold the trial judge’s finding that McKee was an employee. Reid’s argued that McKee was neither an employee nor an independent contractor, but rather a “dependent contractor”. The Court of Appeal agreed that the law recognizes “dependent contractor” as an intermediate position between employee and independent contractor status, but rejected Reid’s argument that McKee was a dependent contractor rather than an employee.

The Court of Appeal found that the intermediate category of dependent contractor 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. The Court held that workers in the dependent contractor category are owed reasonable notice upon termination.

The Court ruled that the legal principles applicable to distinguishing between employee and independent contactors apply equally to the distinction between employees and dependent contractors. Therefore, the dependent contractor category arises as a “carve-out” from the nonemployment category and does not affect the range of relationships captured by the employment category. The first step is to determine whether a worker is a contractor or an employee using the traditional test to distinguish employees from independent contractors. For that analysis, the central question is, “whose business is it?”. In making this determination, exclusivity and whether the individual engages workers to help perform the work are relevant, but not determinative.

The fact that McKee operated a business in her work for Reid’s was not determinative of her work status, nor even was the fact that she hired and supervised her own sales staff. Based on the trial judge’s findings that McKee worked exclusively for Reid’s, was subject to Reid’s control as to how she provided her services, performed her sales function in model homes provided by Reid’s and used stationery and forms provided by Reid’s, was financially dependent on fixed commissions received from Reid’s, and was part of a sales force that formed a crucial element of Reid’s business, the Court of Appeal upheld the conclusion that she was an employee. The Court of Appeal stated that because the determination of employee or contractor status is a case-specific, discretionary analysis, the trial judge's findings of fact are owed considerable deference.

Under the 1987 agreement, either party could terminate the relationship on 30 days’ notice, a termination period that would violate the Ontario Employment Standards Act, 2000 if applied to an employee. Since McKee was found to be an employee, not a dependent contractor, and because the trial judge found that the 1987 agreement was spent, the issue of whether the 30 day notice period would have been sufficient for a dependent contactor did not arise. As Reid’s did not dispute that McKee would be entitled to 18 months’ severance if she was an employee, the Court of Appeal upheld the 18 month notice period assessed by the trial judge.