Understanding Termination of Contractor Agreements

Employment can take many forms, and in certain situations, hiring a contractor may be more suitable than bringing on an employee. Since contractors do not have the same rights as employees, this is an important distinction to take into consideration. The issue of what rights a contractor has in the event of termination, or the end of the employment relationship, becomes complicated by the fact that a contractor may be regarded as either independent or dependent.

In this blog we review the differences between contractors and employees, and their rights surrounding terminations.

Contractor Rights and Employee Rights

Unlike employees, contractors are not entitled to the same statutory protections and benefits under employment law. Employees typically receive benefits such as minimum wage, overtime pay, vacation pay, and employment insurance. In contrast, independent contractors are considered self-employed and do not receive such benefits. Contractors have more freedom in their work, but they are responsible for their own taxes, insurance, and business expenses.

What’s the difference between independent and dependent contractors?

Independent contractors operate their own business and can have diverse income sources from multiple clients. Generally, they control how they work, including the hours and in some circumstances, the choice to hire additional staff. Independent contractors can also have more flexibility in choosing who they want to work with, and they are not typically entitled to severance pay upon termination unless specified in their contract.

However, dependent contractors have a closer relationship with a single client and rely on them for the majority of their income. This economic dependency entitles them to certain employee-like benefits, such as reasonable notice or severance pay upon termination. The classification of a contractor as dependent or independent can significantly affect their rights and entitlements upon termination.

Do contractors have the right to reasonable notice?

Contractors may be entitled to reasonable notice, particularly if they are classified as dependent contractors. Courts have acknowledged that dependent contractors, like employees, are entitled to reasonable notice of termination. This entitlement arises because they are economically dependent on a single client, often working exclusively or primarily for that client.

In the case of Khan v. All-Can Express Ltd., the court awarded a dependent contractor four months’ notice post termination.

How does the termination notice for dependent contractors compare to employees?

The termination notice for dependent contractors is generally similar to employees, with both groups being entitled to reasonable notice of termination. However, there are some factors to consider:

• Legal basis: Employees are entitled to reasonable notice under both statutory employment standards and common law. Dependent contractors are not covered by the employment standards legislation; however, they are entitled to reasonable notice under common law principles.
• Calculation of notice: Similar considerations apply to dependent contractors when determining reasonable notice as they do to employees. This includes length of service, age, nature of the work, and likelihood of finding similar employment.
• Contractual provisions: For both employees and dependent contractors, any termination clause in their contract may limit the common law reasonable notice period, provided the clause is enforceable.
• Inclusion of contractor period: If a worker transitions from dependent contractor to employee status, courts may consider the entire length of the relationship when calculating the notice period, potentially resulting in longer notice periods.

What if my employment contract says I’m a contractor?

If you signed a contract stating you are an independent contractor, it does not necessarily mean that’s your true employment status. In Ontario, whether you are an employee, or an independent contractor is determined by the nature of your working relationship rather than the terms of your contract or what your employer says.

Similarly, you are not automatically classified as an independent contractor just because your company does not deduct taxes from your pay cheques.

Legal considerations for terminating contractor agreements

The termination of contractor agreements should be guided by the terms outlined in the contract. A well-drafted contract should clearly define the conditions under which the relationship can be terminated, including notice periods and any compensation for early termination. It is important for both parties to understand these terms to avoid disputes and potential legal claims.

Misclassification can lead to legal challenges, as seen in cases where courts have reclassified contractors as employees based on the nature of their working relationship. This reclassification can result in the employer being liable for employee benefits and protections that were not initially provided.

Takeaway

Understanding terminations of contractor agreements is vital for both contractors and employers. While independent contractors typically do not receive reasonable notice, dependent contractors do. This is why proper classification, and clear contractual terms can help mitigate risks and ensure compliance with legal standards.

If you are an independent or dependent contractor that has been terminated and seeking guidance, we encourage you to contact us online or by telephone at 416-214-5111.