Misclassification of employees as independent contractors is one of the most common issues in the world of employment law. Employers and employees often do not realize that it does not matter what they “agree” to – even if they stamp the label of contractor in the written agreement, courts will look at the true nature of the relationship.

A recent case confirms that as with terminating an employee’s fixed-term contract, a company cannot terminate an independent contractor’s fixed-term agreement without providing notice, unless there is an enforceable early termination clause. Accordingly, it is not only misclassification that employers need to worry about; rather, terminating an independent contractor’s fixed-term contract can prove to be costly as well.

Facts

In 2023 ONSC 5661, the plaintiff worked as a real estate agent for the defendant. Initially, the parties entered into a one year fixed-term contract, which was then extended for another year. The contract included a termination clause allowing either party to terminate the agreement “at any time with written notice to the other party”.

The defendant terminated the contract 11 months before the end of the fixed term but without any notice to the plaintiff.

The plaintiff obtained a new job in less than a week.

The plaintiff sued the defendant. While the parties agreed that the plaintiff was a contractor and not an employee, they disagreed on whether he was a dependent contractor or an independent contractor. The plaintiff and the defendant also disagreed on whether the contract contained an enforceable early termination clause. Finally, the parties agreed that the plaintiff had a duty to mitigate his damages.

Analysis

First, the Court found that it did not matter whether the plaintiff was a dependent or an independent contractor because his damages would be the same regardless. Second, the Court held that the defendant could not terminate the agreement without notice; in fact, the defendant was required to provide notice to the end of the one year term. Finally, the Court awarded the plaintiff damages while giving adequate consideration to his mitigation income, since he obtained a job six days after the termination of his contract.

The Court stated:

[7] The law is clear that when a fixed term contract is terminated, the terminating party owes the non-terminating party damages equal to the amount that would have been earned under the contract for the duration of its term subject to the nonterminating party’s duty to mitigate unless there is an enforceable early termination clause. This is the case regardless of whether [the plaintiff]’s relationship with [the defendant] is characterized as a dependent contractor relationship as [the plaintiff] argues or an independent contractor relationship as [the defendant] argues.[1]

[8] Until recently, there was some confusion about the degree to which the obligation to mitigate applied to fixed term contracts, especially in independent contractor relationships. In Monterosso v. Metro Freightliner Hamilton Inc.,[2] the Ontario Court of Appeal recently made clear that independent contractors working for fixed terms have a duty to mitigate, subject to an agreement providing otherwise.[3]  [The plaintiff] agrees that he had a duty to mitigate regardless of whether his relationship with [the defendant] is characterized as one of an independent or dependent contractor.

The Court further stated that:

[21] … It is a well accepted canon of contractual interpretation that contracts should be read as a whole and should be read harmoniously so as to avoid conflict between terms and so as to avoid rendering any terms superfluous. The easy way of doing that here is to interpret the concept of “notice” in accordance with the well-established concept of common-law notice of termination in the sense of advance warning.

Since the plaintiff was paid on a commission basis, it was challenging to calculate the damages. The Court decided to calculate the damages based on the plaintiff’s average monthly earnings, reduced by 45% based on evidence that 1) the real estate market had declined during the applicable period, and 2) the plaintiff’s earnings would have declined accordingly. The Court ordered the defendant to pay damages of $21,034.01, representing the plaintiff’s damages during the 11-month notice period to the end of the fixed-term contract, minus his actual earnings from his new job during the notice period.

Key takeaways

This decision highlights the importance of carefully handling fixed-term contracts as employers can otherwise be exposed to unnecessary liability. Ideally, employers should have a properly drafted contract in place that clearly sets out the terms and conditions of the working relationship, and they should also seek legal advice prior to proceeding with terminations. Even when it comes to an independent contractor relationship, employers can be subjected to substantial liability. Note that other provinces may treat fixed-term contractor agreements differently than Ontario.

By Nadia Zaman