July 23, 2003

Notice of Termination

True independent contractors not entitled to reasonable notice of termination

If an employer dismisses without just cause the employer is required to provide “reasonable notice” of termination or payment in lieu thereof.

This obligation is implied into every employment relationship and cannot be waived nor can an agreed length of notice fall below minimum legislative standards.

Canadian law has not afforded independent contractors the same severance entitlements. Instead, subject to any contractual provision, true independent contractors can be terminated without notice, whether with or without just cause.

In the case of Aqwa v. Centennial Home Renovations Ltd. the trial judge read-in a provision of reasonable notice in a pure independent contractor relationship. This was a marked departure from existing caselaw.

Thankfully, from an employer’s perspective, the Ontario Court of Appeal has overturned that decision.

The case: Aqwa v. Centennial Home Renovations Ltd.

On May 10, 1995, Ron Aqwa signed an agreement to serve as an “independent sales agent” for Centennial Home Renovations Ltd. The agreement included a clause which stated that “[i]t is agreed that either party may terminate this agreement at any time without notice or penalty.”

Aqwa was abruptly dismissed in December 1996. In accordance with the contract, no notice of termination was provided. In response Aqwa asserted that the true relationship between the parties was one of employment and not an independent contractor relationship. He claimed the agreement was not fully explained to him and, therefore, the termination “at will” clause should be ignored and he should receive severance.

If a finding was made that Aqwa was an employee then the contractual provision denying him any notice of termination would be contrary to the minimum legislative standards and he would then be entitled to reasonable notice at common law.

At trial the judge said this situation was akin to a traditional employment relationship because of the many ties between Aqwa and Centennial that mirrored an employer-employee situation. The court noted that all employment-like relationships are based on unequal bargaining power with employees and contractors being a particularly vulnerable group in society who require protection at the time of termination.

He held that because of the unequal bargaining positions of Aqwa and Centennial at the time the agreement was made, and the lack of what the trial judge described as “mutuality” in the effect of the termination provision in the agreement, the court should refuse to enforce the agreement the parties had made and should read a term into the agreement requiring reasonable notice upon termination. Regardless of the terms negotiated by the parties the court implied a term of reasonable notice or “reasonable dealing” into this independent contractor contract since it closely resembled an employment relationship.

Despite the termination at will provision, the trial judge held Aqwa was entitled to reasonable notice upon termination by Centennial without cause. The judge read into the contract a provision for breach of contract, which he claimed would have been included had both parties been contracting in a position of fairness and awarded Aqwa five-months’ compensation in lieu of notice.

The Ontario Court of Appeal unanimously reversed the decision of the trial court. The Appellate Court held that because Aqwa fully understood the explicit provisions of the contract, and because he was not in a vulnerable position relative to the other contracting party, the contract should not be set aside by the court. The Appeal Court did not consider the contract to be inherently unequal or unfair.

It pointed to a number of provisions in the contract for services which benefited Aqwa, including the flexibility of the work schedule, and that he could sever his connection with Centennial whenever he saw fit. The Appeal Court found absolutely no basis for setting aside the contractual agreement reached between the parties which provided Aqwa with no notice of termination.

Reasonable notice reserved for employees

Power imbalance between independent contractors and employers is different

Inherent in the conclusion of the Appeal Court in the Aqwa decision is the recognition that a true independent contractor is not entitled to reasonable notice of termination. Reasonable notice is a concept reserved for employment relationships or quasi-employment relationships.

Where the parties are in a true independent contractor relationship and where the parties expressly agree in writing that the parties can terminate the relationship without notice or pay in lieu of notice, then there is no basis for the court to read in a provision of reasonable notice.

The Appeal Court implicitly rejected the trial judge’s notion that due to an inherent inequality of bargaining power, a reasonable notice provision should be read into every such contract.

Independent contractor relationships are premised on two “business people” entering into a loose arrangement for services.

By their very nature, true independent contractors are less reliant on any one “employer” for their livelihood and therefore the power imbalance suggested by the trial judge simply does not exist to the same degree as between an employer and employee.

Tips for employers to ensure independent contractors are not found to be employees

It is not uncommon for an independent contractor to allege he was in fact an employee at the termination of the independent contractor relationship. The basis for such an allegation is typically to make a claim for reasonable notice of termination from the contracting party. This decision clarifies that a court should not read-in a reasonable notice provision to a true independent contractor relationship. But contracting parties often end up blurring the lines between employer and contractor and therefore run the risk of having a court conclude the party you thought you were in a contractor relationship with was in fact your employee.

The following tips are helpful to avoid these problems.

  • Have a written contract that specifies the relationship is that of an independent contractor and not one of employment.
  • It is sometimes worthwhile (especially where the lines between employee and contractor are becoming blurred) to include a notice provision in the contract which provides the contractor with entitlement to notice or pay in lieu of notice in accordance with the terms of applicable minimum employment standards. Therefore even if the contractor was later found to be an employee the contractors entitlement to notice would be limited to the statutory minimums rather than becoming vulnerable to a claim of reasonable notice at common law.
  • Ensure that your independent contractors exhibit the characteristics of a true independent contractor:
    • Control: Indicators such as being subject to set hours of work, disciplinary and other policies and day-to-day direction will likely indicate an employment relationship.
    • Ownership of tools: Indicators such as the use of assistants who are employees of the employer, use of a desk, telephone and other facilities of the employer and use of the employer’s equipment will lead to the conclusion that the relationship is one of employment. One should note that modern times necessitate a broad view of the word “tools.”
    • Chance of profit and risk of loss: A true contractor is a business person who is subject to profit or loss depending on the success of the business enterprise.
    • Integration in the employer’s business: An employee is employed and his work is done as an integral part of the business. Whereas an independent contractor’s work, although done for the business, is not integrated into it.
    • Independence: The ability of the individual to provide his services to someone other than the employer is an important factor considered by the courts. Where the individual is free to do so, it is more likely an independent contractor relationship exists.

Chris Foulon is a partner in the Toronto law firm of Israel Foulon LLP – Employment and Labour Lawyers. He can be reached at 416-640-1550 or cf@israelfoulon.com. A version of this article originally appeared in the Carswell publication, Canadian Employment Law Today.

LEGAL DISCLAIMER: This article is for informational purposes only and is not intended to provide legal advice, which in all circumstances must be tailored to the specific facts of any problem. You should obtain a proper legal consultation in order to determine how this article applies to your specific situation.
Please feel free to contact Israel Foulon LLP to learn more at 416-640-1550.

Notable Events

Latest Legal Articles