Termination of Contractor Agreements in Ontario – Know Your Rights

When contractor agreements in Ontario are terminated, one of the most important questions to ask is what type of contractor are you? The answer will have important consequences. For instance, an independent contractor will receive no severance or common law notice when terminated, whereas a dependent contractor will. It is important to correctly distinguish between the two. A difficulty arises when employers misclassify their employees as independent contractors. 

Rules for Terminating Contractor Agreements in Ontario

A contractor agreement defines the business relationship between the contractor and the company that hires them. The agreement clarifies the respective obligations and sets out the service the contractor will provide and for what compensation. 

The contractor agreement should clearly state the duration of the contract, explain when and how the agreement may be terminated, and how much notice is required. A contractor should always look first at their agreement to get a sense of what their rights might be. It is possible for a contractor agreement to say that no notice is required to terminate the agreement. 

Risk of Misclassification

Employers will sometimes misclassify their workers as independent contractors hoping to avoid their obligations under the Employment Standards Act, 2000. These obligations include minimum benefits such as overtime pay, vacation pay and severance pay. It is cheaper to hire independent contractors than it is to hire employees. 

Workers should be aware that although an agreement may say they are contractors, this might not actually be the case. To determine if a worker is truly a contractor, courts look not at the words used in the contract but at the nature of the employment relationship. Courts generally look at the level of control the employer has over the worker’s activities, and on whose behalf the worker is providing services (i.e., for themselves, or for the employer). The greater the control the employer has, the more likely the worker is an employee and not a contractor. 

If a worker is a contractor, it must then be determined if the contractor is an independent contractor or a dependent contractor. This typically depends on whether the contractor works exclusively for one employer, and whether the worker is financially dependent on that employer. If the contractor works exclusively for one employer and is in a position of economic dependence, they are likely a dependent contractor and entitled to severance pay. 

Duty To Terminate Contractor Agreement in Good Faith

An employer has a duty to terminate a contractor agreement in good faith. In Mohamed v. Information Systems Architects Inc., the employer had the right to replace the contractor for any reason and without any notice. The replacement would take effect immediately. The provision was clear and had no ambiguity. Nevertheless, the Ontario Court of Appeal confirmed that the employer “had an obligation to perform the contract in good faith and therefore to exercise its right to terminate the contract only in good faith.” 

Independent Contractors and Common Law Notice

Employees should further note that time spent as an independent contractor can still influence the determination of common law reasonable notice. In Cormier v. 1772887 Ontario Limited c.o.b. as St. Joseph Communications, an employee with 23 years’ service was found to be a dependent contractor for 8 of those years. All 23 years of service were considered, and the employee was awarded 21 months’ notice. The judge asserted that even if the employee had been an independent contractor for those 8 years, it would have been “wrong in principle” to ignore those 8 years in determining the notice period. 

Contractors with Fixed Term Contracts 

Many contractor agreements will specify a starting day and an ending day for the agreement, known as a fixed term contract. Where the employer chooses to end the agreement early, the contractor may be owed their wages for the remainder of the contract, provided nothing in the contractor agreement says otherwise.

In the case of Mohamed v. Information Systems Architects Inc., both parties entered a contractor agreement intended to last six months. However, one month into the contract, the employer discovered the contractor had a criminal record and terminated him. The contractor sued for six months’ pay, which was the entire term of the agreement. The motion judge agreed with the contractor and awarded him his wages for the unexpired term of the contract, with no duty to mitigate. The motion judge, the Honourable Justice Paul M. Perell of the Superior Court of Justice, awarded judgment to Mr. Mohamed in the full amount of $82,540.92 plus $25,000 in costs.

The motion judge relied on an earlier Ontario Court of Appeal decision, Howard v. Benson Group Inc. (The Benson Group Inc.), 2016 ONCA 256. The employer appealed and argued that the Howard v. Benson principle only applied to employees, not independent contractors. The Ontario Court of Appeal disagreed but did not definitively say the principle applied to every fixed term contract of independent contractors. Instead, while the principle can apply to independent contractors, whether it does or not is determined on a case-by-case basis. In this case, the contractor’s right to damages was triggered by the employer’s failure to terminate the agreement in good faith.

Speak to an Employment Lawyer 

If you are a contractor, it is important not to simply believe what your contract says. It is always better to speak with an expert to ensure you are not missing out on any of your entitlements. If you have been terminated, you may be owed severance and common law notice. 

If you believe you have been misclassified by your employer, you should speak to an employment lawyer.  The lawyers at Monkhouse Law have extensive experience dealing with misclassification cases. They are counsel on several class actions fighting against misclassification. If you have been misclassified, you may be owed vacation pay and overtime pay.

This was written by Shane Burton-Stoner, an Employment Lawyer at Monkhouse Law. Monkhouse Law is an employment law firm located in Toronto with a focus on workers’ issues. Give us a call at 416-907-9249 or fill out this quick form. We offer a free 30-minute phone consultation.

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