Canada: Avoiding Independent Contractor Liability In M&A

The distinction between employees and independent contractors is significant as it pertains to workers' legal entitlements. Employees have an exclusive working relationship with an employer, which engages rights and obligations under applicable employment legislation and the common law. By contrast, independent contractor agreements are entered into by legal and contractual equals. As a result, independent contractors are not afforded employment law protections.

The misclassification of employees as independent contractors continues to attract considerable legal action and media attention. Recently, Ontario has seen a rise in class action lawsuits involving claimants alleging to have been misclassified by their purported employers. If found to have misclassified employees, these companies could face claims for unpaid Employment Insurance and Canada Pension Plan contributions, wages and benefits, as well as various categories of damages. Canadian companies would be well served to consider the risk of inheriting independent contractor liability through M&A deals. Specifically, an assessment of the target company's workforce should be undertaken as part of the due diligence process to ensure that workers are classified correctly and penalties are avoided. An overview of the law relating to the classification of workers should help guide this analysis.

In a recent decision emerging from Quebec, an individual was held to be an employee despite being labelled an independent contractor in a franchise agreement with the deemed employer. In reaching this decision, the Supreme Court of Canada affirmed that the language used in an agreement is not determinative of whether an employment relationship exists between parties. According to the majority of the Court, "the inquiry must assess the actual nature of the relationship between the parties, regardless of the terms of and labels used in the franchise agreement." An employment relationship was identified based on several factors including the assumption of risk and opportunity of profit, degree of control and ownership of tools. Similar factors have been considered by courts in common law jurisdictions.

Notably, the Ontario Court of Appeal has recognized dependant contractors as an intermediate classification between an employee and independent contractor. Dependant contractors appear to work for themselves, but may be entitled to protections usually reserved for employees because of their dependence on a single employer. While this status is still developing, dependant contractors have been extended common law damages for wrongful dismissal.

Based on the foregoing, M&A due diligence must involve more than simply reviewing the independent contractor agreements of a target company. Whenever possible, buyers should also request access to employment data, contractor lists, job profiles, descriptions of services, service histories, pay records and other available information as part of the discovery process. Buyers should be attuned to the labour and employment practices of the companies they are dealing with in order to avoid independent contractor liability, particularly as this area of the law continues to unfold.

The author would like to thank Lila Yaacoub, summer student, for her assistance in preparing this legal update.


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