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Tax Court Recently Tackles the Employee vs. Independent Contractor Question

For employers across all industries, the question of whether someone is an employee or an independent contractor can have significant consequences.  Whether the question is being considered in the context of employment insurance, labour relations legislation, employment standards, WSIB obligations or any other applicable employment statute, the parties to the relationship have significant interest in maintaining one position or another.  Government remittance obligations, termination and severance entitlement and union representation issues are all affected by the way the relationship between the parties is defined.

While there are varying tests depending on the forum and context in which the issue is being examined, and the different analyses do not always coincide in the result, the Tax Court of Canada has recently provided two examples of how the intention of the parties can help shape that Court’s analysis.  In two recent cases, each of which was decided by the same judge, the Tax Court of Canada upheld the independent contractor relationship after the workers in question tried to claim employee status when it no longer suited them to be independent contractors.

In the first case, Prue v. Canada (Minister of National Revenue), Garee Prue was an in-store product demonstrator for Strauss Herb Company in Vancouver grocery stores.  The evidence showed that she had a great deal of autonomy in her work, including the following: she was not supervised while in the store, used her own transportation, had no financial risk or guarantee of income, and could accept or refuse assignments with no risk of sanction, as well as being able to provide her services to another company.  Although Ms. Prue was content to view and describe herself as an independent contractor when she was busy, when she was no longer working, she suddenly decided that she must have been an employee all along, and applied for Employment Insurance benefits.

The Canada Revenue Agency denied that she was an employee and said she was not insurable under the Employment Insurance (“EI”) scheme because an employer-employee relationship did not exist.  Ms. Prue appealed to the Tax Court of Canada.

In his decision, Justice Rowe essentially found that in applying for EI benefits Ms. Prue was engaged in revisionist history by changing the way she regarded her relationship with Strauss Herb Company.  The decision gives specific weight to the intention of the parties, stating:

“In instances where both parties in a working relationship have acted consistently in accordance with a perceived status it is important to take into account the motive one may have for creative revisionism… . I am satisfied both parties intended that Prue provide her services as an independent contractor and that she did so throughout the entire relevant period. The parties conducted themselves in a manner consistent with that intent. It is perplexing to comprehend how Prue thought a latent desire to become – someday – an employee of Strauss … could serve as a magic device to transform her actual working status from independent contractor to that of employee, particularly by means of a retroactive characterization.”

The second, similar case decided by Justice Rowe four days later involved an independent truck driver. In the case of Smith v. Canada (Minister of National Revenue), Mr. Smith drove a truck for at least three different companies, where he kept a percentage of the revenue.  However, when Mr. Smith tried to assert his employee status, Justice Rowe again agreed with the Canada Revenue Agency’s characterization of the relationship between Mr. Smith and the company in issue as one of an independent contractor, citing similar reasons as in the Prue decision.

You can be certain that neither of these decisions will be the last word on the issue, particularly in light of the fact that the different statutes under which this question is considered have different purposes and therefore offer the potential for varying outcome.  However, the strong statements made by Justice Rowe with respect to the employees trying to change their status after the fact are encouraging for employers who protect themselves with clear contractual language that differentiates between an independent contractor and an employee.

The CCP team is experienced with the various laws and tests for determining independent contractor status and can help companies draft the types of agreements necessary to demonstrate the true intentions of the parties which can, in turn, save employers time and money down the road.

Please Note: This blog has been prepared as an informational service for our clients and other interested parties. It is not intended to constitute legal advice, a complete statement of the law or opinion on any subject. Although we endeavour to ensure the accuracy of the content, no one should act upon the information provided without a thorough examination of the law after the facts of a specific situation are fully considered.