What's an employee?

Outdated laws have created a class of undefined workers with undefined rights. How legislators respond will have severe consequences for businesses reliant on flexible labour
Illustration: Roberto Cigna
Illustration: Roberto Cigna
HAVING A JOB, going to the office, really used to mean something. It meant getting dressed and going to a desk or work station, where you were surrounded by employees of the same company. It meant collecting a regular paycheque and automatically contributing to Employment Insurance and the Canada Pension Plan. It meant getting benefits, overtime, parental leave, a pension and, if things didn’t work out, severance pay. A job was something you did five days a week, 48 or so of the year, until you retired.

These are quaint notions for Canadians who have felt the impact of technology, trade, globalization and a host of other factors on the workplace. People now work flexible hours. They work from an office, home, café or really anywhere they please. Many are engaged through employment contracts. They bring personal devices into the office to work and company devices home to play. In short, the lines that used to define our workplace
and separate internal from external, dependent from independent, and employee from contractor have blurred.

You can even find people today who have been on contracts for years, working side by side with full-time employees. Either category can just as easily work from home at nine o’clock at night as from their desk at nine o’clock in the morning, allowing companies to cut costs by relying more heavily on less expensive, and sometimes more efficient, employment arrangements such as telecommuting.

Is employment law keeping up? In general, employment law in Canada is governed by the provinces. Ask most employee-side lawyers whether the provincial statutes reflect the changing reality and most would say no. They suggest, rather, that the modern workplace has created an underbelly of so-called “vulnerable workers”
often forced by ethnicity, race, gender, ability, age or immigration status to take temporary work that gives them no security, no say over their hours and few or no benefits. They argue that this type of worker is not protected nearly well enough by the law.

Many management-side employment lawyers would disagree, arguing that the laws that have been in place for decades are reasonable and principled, offering a balance of freedoms and protections. Barbara Johnston, head of the Calgary labour and employment group at Dentons Canada LLP, for example, says that in her view “robust employment policies” combined with common law make overhauling the legislation unnecessary.

Robert Sider, a management-side labour and employment lawyer at Lawson Lundell LLP in Vancouver
who is also called in Alberta is not so sure. He says it’s fair to say that, aside from targeted efforts here and there, employment laws across Canada are not substantially different from the time when people used a quill and ink to work. And all the changes that an iPhone or a laptop imply? “The legislation’s not keeping up with the reality.”

One province, however, is trying to do something about it: Ontario. Last summer, as part of its Changing Workplaces Review, the province’s Ministry of Labour released an interim report on how it could modernize the workplace. The report makes a number of provocative suggestions, and uses politically charged language to describe inequities and social issues that, until now, had been considered part and parcel with contract work.

Formal recommendations are not yet on the table, but even the thought of expanding entitlements for non-employees has sounded the alarms for businesses
not only in Ontario, but across the country. Because if sweeping new labour laws do take hold in Canada’s most populous province, how long can it really be before other legislatures start to take a look?

INEQUITY MANDATE

Ontario’s decision to tackle its antiquated employment regime, which dates back to the mid-1880s (with occasional revisions) can be traced to July 3, 2014, when then Ontario Lieutenant Governor David Onley rose to his feet to make the new Liberal government’s speech from the throne.

Onley said a changing economy means a changing workplace, and announced that the new government would be consulting with Ontarians “in the context of our labour and employment law regime.” Anyone who assumed this meant a mere tweaking was disabused of that notion when, in her mandate letter to Labour Minister Kevin Flynn, Premier Kathleen Wynne wrote that “leading a review of Ontario’s system of employment and labour standards” would be his top priority.

She instructed Flynn to consider reforms that reflect the realities of the modern economy, “such as the rise of non-standard employment and the reduction in the prevalence of employer benefits and training.” Two independent special advisors were appointed to lead consultations and to recommend changes to the Employment Standards Act, which covers non-unionized employee rights, and the Labour Relations Act, which governs unionized employees
the first such review in over a generation.

In l
ate July, special advisors Michael Mitchell and John Murray after 12 days of hearings and 300 written submissions issued an interim review. While only the final report (which is expected in the new year) will contain recommendations, some of the suggestions and observations in the initial review are already causing some business people and their legal counsel conniptions.

Acknowledging in the introduction that the
existing legal framework was designed largely for an economy “dominated by large fixed-location worksites, where the work was male-dominated and blue-collar, especially in manufacturing,” the report notes that today’s landscape is vastly different.

 Technology has changed everything. Computers and the internet paved the way for just-in-time delivery systems, robotics, 3-D manufacturing, movie streaming, bar-code scanning systems and the new so called “sharing economy,” manifested by such companies as Uber and Airbnb. While Ontario’s once mighty manufacturing sector has been severely weakened, the service sector has grown along with the kind of employment that, the report states, is the sweet spot for low-wage, temporary jobs, “many of them unstable with little or no security, and mostly without benefits.”

The advisors said after the first round of consultations that they heard again and again this “significant and growing” part of the workforce includes “a disproportionate number of women, racial and ethnic minorities, immigrants and youth” working mainly in areas such as food services, home care, child care and custodial services, as well as agriculture and temp agencies. The review notes there is a greater degree of “social isolation” in this vulnerable population and “a disproportionately high level of mental health issues … as well as a deterioration in their overall physical health.”

So what does the province have in mind? No one will know for sure until recommendations are released, but observations like this have management-side lawyers concerned about what the advisors are going to recommend
 and what Ontario’s Liberal government is prepared to do with those recommendations.

DEPENDENT CONTRACTORS

A very quick primer is in order to understand the next point. There are employees, who enjoy all the rights of full employees. There are independent contractors, who don’t enjoy those same protections but have different rights. Then there are also so-called “dependent contractors,” who are something of a hybrid.

The definition of a dependent contractor is hard to pin down, but it’s generally based on the amount of time worked for a client company and the proportion of income received from that client. So a contractor may start out independent, but over time become dependent. The work may not have changed in any way, but the relationship has, and the difference is huge because dependent contractors are already entitled to some employee protections.

Still, they’re not entitled to all the protections of an employee
and that could be about to change, if the special advisors’ report holds any sway. In their report, the advisors make no bones about their suspicion that many companies are classifying new employees as dependent contractors to save their companies the costs of EI, CPP, health benefits, paid holiday time, etc.

Currently, about 630,000 Ontarians
12 per cent of the total Ontario workforce call themselves self-employed, but the advisors note that both the Ministry of Labour “and significant anecdotal evidence” suggest that a portion of them are misclassified. Karine Dion, a labour and employment associate at Nelligan O’Brien Payne LLP in Ottawa, says it’s much cheaper for companies if you’re not an employee, “but it would be hard to argue if a company has 200 contract workers that they don’t have employees.”

Many employer-side labour and employment lawyers across the country share the worry that companies are misclassifying portions of their workforce, says Lawson Lundell’s Sider. “We as lawyers always have a very significant concern about employees who try to play that line, because if you have employees in your workplace and contractors doing exactly the same thing, in BC at least, you’re running a very significant risk of Employment Standards [Act] finding that they’re employees.

“Then, if you haven’t paid them things like overtime and statutory holiday pay and vacation pay, you’re going to get nailed with a very significant Employment Standards claim. So you’re running a pretty big risk of a claim being made by the independent contractor. But we always find no one complains until after the relationship ends.”

That’s the problem, says Dion, who often represents employees. As things stand now, in Ontario, a contactor who wants to challenge the company has the legal burden of proving they were, de facto, an employee. Because the issue almost always arises after someone’s been terminated, she says, “they have no income, and they have no job. They are the least financially equipped of the parties to mount a legal challenge. The system’s unfair.” The special advisors’ review is asking whether the legal burden should be shifted on to the company to prove that the person was not a de facto employee.

In an era when it’s all about the bottom line and squeezing the margins, contract employees are a valuable financial tool, so two things seem certain about this proposed change: one is that it will be fought tooth and nail by the business community; and two is that it would send the amount of employment suits handled by lawyers like Dion through the roof, with contractors suing companies for the same wages, benefits and back pay as they would have received as employees.

CIRCLE OF LIABILITY

Another issue in the review that is sending out red flags in the employer community is the question of who is the employer with the direct responsibility towards an employee and, specifically, whether there should be changes that would create so-called “related and joint employers,” says Michael Sherrard of Sherrard Kuzz LLP, a management-side employment boutique.

It’s an issue closely tied to globalization. Some sectors once protected by tarriffs, notably manufacturing, are now subject to intense international competition, especially from imports from low-wage developing countries. To compete, companies have contracting out non-core work to lower-cost suppliers. A manufacturing company, for example, may decide to sub-contract out its maintenance department, which takes care of all its machinery, to a standalone third-party company that specializes in that. It’s cheaper
the manufacturer doesn’t have to do training and HR for the maintenance workers and definitely more efficient than doing it in-house.

What the review puts on the table, says Sherrard, is the question of whether the manufacturing company should share liability related to those maintenance workers, even though they are not employed by the company itself. “That’s a big concern,” he says, “because many employers have set up their commercial relationships based on certain assumptions.

“They’ve made decisions to engage specialized expertise that can do part of their production better than the company. So when you set that all up, then you have a government looking at possibilities that could interfere with some of those commercial relationships, it’s obviously a worry.” And they’re looking at not just sub-contracting but also outsourcing, temp agencies and other kinds of businesses that provide services as well.

What’s particularly troubling for some observers is the “undertone or theme” of the review, says Sherrard, and how it echoes what’s going on in the United States, where there’s been a fair bit of litigation before the
US National Labor Relations Board.

While the
NLRB has had a longtime standard where two or more businesses can be counted as joint employers of a single group of workers, to be considered an employer under US law, employers had to have “direct and immediate” control over terms and conditions of employment. The NLRB revised that 30-year-old definition in a landmark 2015 decision to add “indirect control,” or even the ability to exert such control even if it’s not used.

There are multiple implications of bringing the same standard in to Ontario. In a case where the manufacturing company and the maintenance subcontractor have joint responsibility, for example, the subcontractors’ employees become additionally eligible to vote on any move to unionize the company, says Sherrard. All things considered, he says, this kind of change can have a “dramatic change on the respective parties’ responsibilities.”

So there’s a “great worry” in Ontario’s employer community about having this expanded role among companies that sub-contract out part of their business, use temporary help or even a recruitment agency. He says some see the government’s review as a conscious look at: “Should we expand the circle of liability? Where business is seeing its needs met in the market, the government is looking for deeper pockets.”

FRANCHISOR EARTHQUAKE

One group of businesses that would be hard hit by “related-and-joint” employment classification is the franchise industry. Franchisors are ubiquitous, and not just the giants like McDonald’s and Starbucks but small ones like Aroma or Pet Valu. The impact would be tremendous, says Larry Weinberg, who practises franchise law at Cassels Brock & Blackwell LLP. In fact, he says, there’s been a “chilling effect” on the number of new franchises opened since the report was issued in July. “I have clients who have already expressed concern to me about coming to Ontario, even with the suggestion the Ontario government might do this. People have said they’re going to wait and see what happens.”

The way it works now is the franchisor just leases its name in return for a percentage of the profits. Each franchisee, says Weinberg, is “a small business owner” who puts their own money at risk. “They’re entrepreneurs. They just happen to be franchisee entrepreneurs.”

That means the people you see serving you at a Boston Pizza or behind the counter of a Dairy Queen are employees of the franchisee, not of Boston Pizza or Dairy Queen. “The franchisee is the one who hires and fires and trains and disciplines and deals with severance. The franchisor doesn’t even have a list of franchisee employees. The franchisor isn’t involved in buying the turnips either.”

Even many lawyers don’t really understand the relationship between a franchisor and franchisee, Weinberg says. While, by law, the franchisee has to exert controls in order to use the name, “it’s a contractual licence relationship that often goes on 10, 20 or more years, with the franchisor getting a royalty of, say, six per cent of sales. If the government all of a suddenly comes along to franchisors and says, ‘You must become involved and you’re responsible for the employees,’ your costs are going to increase. The franchisor doesn’t have the right to go to the franchisee and say, ‘Oh, by the way, you need to give me more money.’ Those contracts are fixed.

“So those established contractual relationships are going to be screwed up. I don’t know a better term than that, if this were to go through.”

So what happens to all the legal licence contracts that were signed for 10 or 20 years? “Nothing legally, except the underpinning, the foundation, the ground under which they were written will have been hit by an earthquake. It will all have shifted.”

Foreign franchisors, if they become co-employers with their franchisees, will find themselves deemed for Canadian tax purposes to have permanent employees, which means they’re taxable in Canada. “I’ve even heard foreign franchisors say they going to avoid Canada, because if they can’t come to Ontario there’s no point.”

Weinberg says franchisors everywhere are watching what Ontario does next because, if some of the issues raised become recommendations and are adopted into law, the impact will be felt “in a variety of ways and for a variety of reasons. It will make Ontario an outlier, not just in Canada but the world.”


AT THE END OF THE DAY, there’s no getting around it. As the Ontario review notes, the market for products and services are increasingly globalized, and more is getting outsourced. Tariff reductions, free-trade agreements and cuts to transportation and communication costs have encouraged this trend. “Canadian companies are now subject to intense international competition,” it says, “especially from imports from low-wage developing countries.”

Canada is also witnessing a re-orientation from east-west trade towards north-south trade between Canada, the
US and Mexico, largely as a result of free trade agreements. The reorientation to north-south makes it likely that Canadian businesses are increasingly competing with US businesses, which tend to have fewer labour regulations and restrictions. One significant concern is that such competition for investment will lead to a “race to the bottom” or “harmonization to the lowest common denominator” in employment and labour law, the review notes.

Ontario may be, for the time being, the only province looking at modernizing its labour laws, but these same forces are affecting every province and territory. So watch where Ontario lands on this one, because as technology and globalization continues to transform business, it may become increasingly difficult for legislators in other provinces to rely on employment laws that can be read on an iPhone, but were drafted around the time the first telephone was invented. It’s just a matter of time.

Sandra Rubin is a Toronto-based writer and strategic consultant.