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Feb 28, 2019

When You Become Dependent on Independent Contractors: The Risk to Employers

By Michael F. Horvat

A recent decision of the Ontario Superior Court is a reminder to all employers of the liability associated with engaging individuals as contractors in circumstances where the practical, day-to-day nature of the economic relationship is that of an employee. This can become particularly tricky to manage when there are transitions in that relationshipfrom contractor to employee or from employee to contractor.

As highlighted in the court’s decision in Cormier v. 1772887 Ontario Limited c.o.b. as St. Joseph Communications (2019 ONSC 587), it is of particular concern where the contractual relationship begins as an independent contract, but develops into a dependent relationship, seemingly on an indefinite and implied basis, unchanged and without regular review. Cormier underscores the need for employers who regularly use long-term independent contractor relationships to understand the real risk of accruing liability that can arise when such contractual relationships are not ended and managed.

Ms. Cormier graduated from college in 1989 to begin a career in the marketing and advertising industry. In 1994, as an independent contractor, she began to work for St. Joseph Communications as a “freelance” Wardrobe Stylist. Over the first five years of this contract, she was wholly occupied by St. Joseph Communications, particularly during their busy seasons, but engaged with other clients occasionally when there was a slowdown. She routinely invoiced St. Joseph Communications, and no deductions were taken or benefits paid. Eventually, however, as her working relationship continued, she seamlessly transitioned into a regular contractor, working exclusively for St. Joseph Communications.

After 10 years of this “contractor” relationship, Ms. Cormier was hired as a direct employee of St. Joseph Communications. The terms of the written employment contract expressly identified her hire date as the date she joined the company as an employee. In addition, the company sought to limit and restrict any future notice and severance liability to that imposed by the Employment Standards Act, 2000, in respect of her employment service with St. Joseph Communications.

After thirteen years as an employee, St. Joseph Communications terminated Ms. Cormier’s employment without notice. Notwithstanding the contract, she was offered notice and severance of 34 weeks (approximately 8 months) for her 23-year relationship with the company. Ms. Cormier rejected the offer and filed a wrongful dismissal claim.

The court first rejected the enforceability of the restrictive termination clause in her contract (for a number of reasons based on current changing state of the law on such clauses). This meant that Ms. Cormier was entitled to common law damages, which St. Joseph Communications stated should be limited to her 13 years of employment, while she claimed it should also include her prior 10 years when she was a contractor.

The court agreed with Ms. Cormier. The applicability of the three types or “classes” of workplace relationships that could be attributed to Ms. Cormier was considered, namely: was she an employee; a dependent contractor (which the court considered to be an “intermediate” classification akin to employment where reasonable notice may be implied); or an independent contractor. Generally, the test for determining whether an individual is an independent contractor or employee is difficult on its own, where the court considers and weighs: the intentions of the parties; how the parties themselves regarded the relationship; the behaviour of the parties towards each other; the economics of the relationship; and how the parties conducted themselves in the business, the delivery of services and/or performance of duties.

The dependent contractor classification is wholly another concern, because it can include elements that are both indicative of an employment relationship and an independent contractor. Fundamentally, however, the question remains, has the individual become (by design or result) economically dependent on the relationship with the company such that the individual becomes “exclusive” for the one company, with all of the day-to-day characteristics of any other employee (except for the invoicing). In this case, the court concluded that while Ms. Cormier was more “independent” for the first year or two, she clearly had become dependent as time passed, and St. Joseph Communications was or should have been aware of this change in the nature of their relationship.

The court, therefore, awarded Ms. Cormier wrongful dismissal damages of 21 months, commensurate for an employee with 23 years of total service (in her position, for her age).

For employers, the Cormier decision should not act as a deterrent to engage in independent contracts. However, it serves to remind employers of the risks and liabilities that can accrue when these contracts are simply allowed to stagnate. An independent contractor arrangement with an individual, such as Ms. Cormier, has a shelf life, and after a year or two, a strong contractor arrangement carries with it the real risk of dependence, often because the company itself becomes more reliant and demanding on the contractor for work and exclusivity. These contractual relationships should be regularly reviewed and (subject to factual exceptions) be transitioned early into true employment contracts (with appropriate consideration and restrictions, as negotiated) or ended for the next contractor.

Cormier is a reminder that, in terms of employment law, the courts will acknowledge and enforce the factual nature and practical characteristics of the day-to-day relationship – and not simply defer to the terms of a purported independent contractor agreement that simply masks the true (or dependent) employment relationship. The courts will ultimately hold the employer liable for the costs that accrue over the duration of the relationship.

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