SCC adopts “business risk” test for distinguishing Independent Contractors from employees in recent case, Toronto Employment Lawyer

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The modern workforce has seen an increase in the popularity of the ‘gig economy’, characterized by short-term contracts, part-time work and/or freelance work. Another common aspect is that often these workers are not paid as employees but rather contractors, stripping them of employment standards protections. Aside from how the worker and company characterize their relationship, the common law has developed to analyze the actual relationship to determine whether a worker is actually in spirit an employee.

This development in the law was for public policy reasons: to protect vulnerable employees and prevent employers from taking advantage of the power imbalance that usually exits between a worker and an employer. In Canada there are a variety of legal tests or factors that can be considered by a decision-maker when determining whether a worker is actually an employee, including the level of control, provision of materials needed for the job, and the business risk faced by the worker. While different courts across the country may express the test differently, ultimately the purpose of the legal test is really to determine: whose business is it? Is the court looking at an entrepreneur sustaining their own business or is it an employee whose work integrally helps another company or entrepreneur with theirs?

Recently the Supreme Court of Canada released their decision in Modern Cleaning Concept Inc. v. Comité paritaire de l’entretien d’édifices publics de la région de Québec (2019 SCC 28) wherein the majority of the Supreme Court held that a Quebec franchisee was an employee and not an independent contractor (IC) of the franchiser. While this case is specific to statutes and labour relations in Quebec, it certainly echoes principles seen across the country and specifically in Ontario.

Francis Borque ran a cleaning business in Quebec and entered into a franchise agreement with Modern Cleaning Concept (“Modern”) in January 2014, wherein he agreed to perform cleaning services exclusively through the franchise agreement. After 5 months, Borque terminated his franchise agreement because he was frustrated with lack of profits and control over his business.

Cleaning services in Quebec are covered by collective agreement “the Decree respecting building service employees in the Quebec region” (“the Act”). The Act sets out minimum standards in the workplace, including wages, hours of work, holidays and overtime. The Act makes the Comité Paritaire de l’Entretien d’Édifices Publics de la Région de Québec (“Committee”) responsible for overseeing compliance with the Decree, and it can therefore take any necessary action arising from the Decree on behalf of employees.

The committee investigated and was of the view that the language of the franchise agreement was not determinative of the reality of the relationship between B and Modern, and that B was in fact an “employee” as defined by the Act, not an independent contractor. In 2014, the Committee commenced proceedings against Modern Cleaning Concept Inc. claiming $9,219.32 unpaid wages and other benefits in relation to cleaning services performed by Borque.

The issue was whether Mr. Borque assumed the business risk and corresponding ability to make a profit that would qualify him as an independent contractor. On appeal from Quebec’s Superior Court, the Court of Appeal of Quebec found that despite assigning the contracts to its franchisees, Modern remained liable to the clients and therefore assumed the business risk. The majority of the Supreme Court agreed.

In the case law the critical factor distinguishing employees from IC’s within the meaning of the Act was held to be the respective degree of risk and the corresponding ability to make a profit. The IC, in attempting to generate a profit, accepts the business risk. The Court outlined secondary factors which distinguish IC’s, including the ability to set working hours and determine methods and manner of payment. The Court emphasized the fact that this is a highly contextual and fact-specific inquiry.

The majority highlights the importance of the “tripartite” business model in this case. The client requested cleaning service, Modern negotiated the contract and guaranteed the quality and provision of services, and the franchisee performed the contract. In this arrangement, Modern remained responsible for ensuring that the services were performed and for the quality of the cleaning services. This means it is an “imperfect assignment” of the contract from Modern to the franchisee, wherein Modern retains liability under the contract to the client.

Justice Abella at paragraph 38 of the decision stated that “the presence of a franchise agreement cannot function to disguise the presence of a relationship between an “employee” and “professional employer” as those terms are defined in the Act.”

The majority made it clear that the fact that an employee has some degree of autonomy and assumed some risk does NOT mean they bear the business risk. Modern limited Borque’s ability to organize his own business, and therefore limited his prospect of making a profit. The majority highlighted the following factors as relevant to Modern maintaining the business risk:

– The franchise agreement tightly controlled how franchisee could get new business

– Modern exercised ongoing supervision over Borque’s work

– Borque had to document work he completed

– Borque received no direct payment from the client, only from Modern

These controls and limits were placed on Mr. Borque to minimize Modern’s business risk. The majority therefore concluded that Mr. Borque was an employee of Modern under the Act and should receive the associated entitlements.

Ultimately this case will have implications for franchisees and franchisors to be mindful of what employment law implications flow from the actual relationship between the parties. It is critical to seek the necessary legal advice about your business relationships and what consequences it may have. Monkhouse Law can help navigate these types of issues for both workers and companies. If you have questions relation to this or any workplace issue, contract Monkhouse Law today.

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