Alberta Court of Appeal Upholds Independent Contractor Relationship
In the recent decision in Gerling v Camrose Regional Exhibition & Agricultural Society, the Alberta Court of Appeal overturned a trial judge's decision that a worker under an independent contractor agreement was in fact an employee, but agreed with the trial judge that the agreement had been wrongfully terminated.
The Court of Appeal affirmed that the Supreme Court decision in 671122 Ontario Ltd v Sagaz Industries Canada Inc. ("Sagaz") continues to be the leading precedent on whether a court in Alberta should find an employee-employer relationship between parties to an independent contractor agreement. The central question is whether the worker is performing services as a person in business on his or her own account. A non-exhaustive list of factors to be considered in determining the nature of the relationship between parties includes:
- the level of control the company has over the worker’s activities;
- whether the worker provides his or her own equipment;
- whether the worker hires his or her own helpers;
- the degree of financial risk taken by the worker;
- the degree of responsibility for investment and management held by the worker; and
- the worker’s opportunity for profit in the performance of tasks.
However, the Court of Appeal clarified that the parties' clear understanding of their legal relationship should be accorded significant weight when:
- it is clear from the agreement that the parties intended to form an independent contractor relationship;
- the agreement was entered into with equal bargaining power; and
- the dispute is between the parties to the agreement with no third-party involvement (such as the Canada Revenue Agency or the Alberta Workers' Compensation Board).
Finally, the Court of Appeal confirmed that aggravated damages are not an appropriate remedy to award corporations. A worker may only be awarded additional damages from a breach of an independent contractor agreement based on a breach of the duty good faith and honest contractual performance.
On September 19, 2012, the Camrose Regional Exhibition & Agricultural Society (the "Society") entered into a one-year management services agreement (the "Agreement") with Papa-T Productions Ltd. ("Papa-T"), an incorporated company. The Agreement was extended a total of five more years. Mr. Gerling was the sole director and shareholder of Papa-T.
On January 4, 2018, the Society terminated the Agreement, 11 months early, for cause. The Society claimed that Papa-T had materially breached the Agreement. The Society alleged, among other things, that Mr. Gerling: (1) provided false information to third parties; (2) had uninvited a guest to one of the Society's events, which could have caused significant damage to the Society's reputation; and (3) had let his previous relationship and dislike for this guest influence his decision making.
The trial judge found that Mr. Gerling was an employee of the Society and that he had been wrongfully dismissed. In the alternative, the trial judge found that the Society breached the Agreement because the Society did not have cause for termination.
The trial judge also awarded aggravated damages to Papa-T because the Society had made unfounded and exaggerated statements about Mr. Gerling in its termination letter and in its Statement of Defense.
Court of Appeal Decision
The Court of Appeal upheld the trial judge's decision that the Society had breached the terms of the Agreement by terminating it for cause.
Importantly, the Court of Appeal held that Papa-T was an independent contractor to the Society, and that Mr. Gerling was an employee of Papa-T. In coming to this conclusion, the Court considered the following factors:
- The Agreement: The parties had a clear understanding of their legal relationship at the time the Agreement was signed. Neither of the parties claimed: (a) that the Agreement did not govern their relationship; or (b) that the Agreement was entered into with unequal bargaining power.
- Third-Parties: The dispute was between the actual parties to the Agreement, so the express intention of the parties should be given greater weight in this case. No third party would be adversely affected by the relationship between the parties (such as cases involving the Canada Revenue Agency or the Alberta Workers' Compensation Board) and the claim did not involve third-party vicarious liability.
- Mr. Gerling performed services on "his own account": Based on the test articulated in Sagaz, the Court of Appeal considered the following factors:
- Mr. Gerling was the sole officer, director, shareholder, and employee of Papa‑T;
- Mr. Gerling specifically requested the Agreement to avoid negative tax consequences;
- The Society never made remittances to the Canada Revenue Agency, Canada Pension Plan, or Employment Insurance on behalf of Mr. Gerling;
- The Agreement was clear and explicit that Papa-T was responsible for its own expenses and costs for necessary labour. The fact that office space, administrative supportive support, computer equipment, and extended health and dental benefits were provided to Mr. Gerling did not affect the relationship between the parties because these were contractually provided to Papa-T;
- Papa-T was able to engage in other business activities unrelated to the business of the Society if such activities were not a material conflict of interest;
- The Society paid GST to Papa-T and reimbursed Papa-T for business expenses;
- The Society was not involved in Mr. Gerling's day-to-day activities;
- The Society paid an allocated salary to Papa-T. Mr. Gerling received a salary from Papa-T regardless of the number of hours he worked on an annual basis; and
- Mr. Gerling did not work solely for the Society. At some point, he also owned a shoe store.
The Court of Appeal awarded general damages against the Society for breaching the Agreement (i.e., the allocated salary for the remainder of the term of the Agreement).
However, the Court of Appeal determined that aggravated damages could not be awarded because such damages only arise in the context of employer-employee relationships. Aggravated damages are not payable from one corporation to another for breach of a commercial contract. Further, parties do not need to prove every allegation in an action regarding the termination of a contract.
Damages for a breach of good faith and honest contractual performance may be payable in cases of a breach of an independent contractor agreement (see Bhasin v Hrynew as the leading case on this topic). In this case, the Society had breached the Agreement by terminating it in the absence of a material breach, but no independent breach of the duty of good faith was claimed by Papa-T, and there was no evidence the Society actively misled or deceived Mr. Gerling or Papa-T.This case is a helpful precedent for parties seeking to structure independent contractor relationships and provides some certainty that Alberta courts will respect the clear intentions of parties in establishing such structures.