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Employment & Labour

Commission sales agents – employee or contractor?

By Bram Lecker and Simon Pelsmakher

Commission sales agents

Do you know someone who perpetually has a pen in their left shirt pocket, a joke on their tongue and an order pad in their right hand? Someone who proudly identifies themselves as “in sales” and a “top producer”? Well then, you have just met one of many ubiquitous commission sales agents. They are the silent and unseen Don Quixote equivalents of the commercial world. They relish the freedom and independence of being their own boss and keeping their own hours. Their reputation and word mean everything to them. Sales quotas and expense control form their main obstacles.

“Dependent” commission sales agents

If you are one of these commission sales agents, what happens when your company ends their relationship with you? Do you have any say when they unilaterally change the deal, such as reducing commission rates, shrinking your territory or turning your cherished customers into “house accounts”? Are you entitled to notice and severance pay, just like an employee?  In all likelihood, your company would argue that you clearly are your own boss, that they owe you nothing! Legally, this is far from the truth.

To settle this, you need to examine the nature of your relationship with this company. Is it permanent and exclusive? And are you economically dependent on them? If you answered yes, then your circumstances are similar to that of a typical employer and employee. In Ontario, the Employment Standards Act, 2000 (ESA) outlines very clear conditions for terminating employees working in provincially regulated industries. However, this piece of legislation lacked clarity about the rights of dependent commission sales agents and contractors.

Therefore, over the last several years, numerous cases went to trial over disputes between such “contract workers” and their employers. Fortunately, our judges stepped in and filled the legal void with progressive rulings under the “common law.“ These are a set of judge-made laws based on precedents. Until our laws were re-written, Ontario employers had to pay attention to these precedents when terminating employees they label as “contractors.” Not doing so became quite expensive.

Independently owned corporations

Not only do our laws protect individuals operating as commission sales agents and contractors, this relationship was also stress-tested for independently owned corporations. In this case, the plaintiff operated an independently owned corporation. He had a long-standing and exclusive business relationship with the defendant for well over thirty years. The court found the relationship to be quite intertwined. Enough so that he identified the plaintiff as an “intermediate class” of worker. While he was not classified as an employee on paper, the parties, he ruled, held a “mutually exclusive but dependent commercial relationship.” Hence, the defendant did not have grounds to unilaterally end the relationship without offering adequate notice and severance. Judges have applied this reasoning to numerous decisions, since.

Legal test of dependence

In this case, the Ontario Court of Appeal composed a fundamental legal test to determine whether “independent” contractors are entitled to notice and severance pay when they are let go. The court looked at how much control the employer had over the worker’s hours and tasks as well as who owned the tools used by the worker. They closely examined whether the individual worked exclusively for the employer in question to determine just how economically dependent and vulnerable this contractor was. This offered a clear method to differentiate between a contractor’s status as “independent” or “dependent.”

Personal service corporations

In this case, the plaintiff was a commission sales representative of a company for more than 20 years. Like many commission sales agents, he preferred to work under the legal status of a personal service corporation. The private corporation remunerated him. Regardless, the judge sublimated the corporate status and applied the litmus test set out in the earlier case. Consequently, he found the plaintiff dependent on his employer and awarded him 20 months pay as reasonable notice for losing his “job.” In another case, the court found yet another independently incorporated sales consultant wrongfully terminated without compensation. And here, the judge concluded that commission sales agents are eligible for termination pay, irrespective of the incorporation status.

Dependent contractors

In a similar caseour team represented the plaintiffs last year in this matter. In this landmark ruling, the court clearly solidified the rights of dependent contractors, making them eligible for reasonable notice pay akin to employees. This husband and wife team had predominately worked for the company for several decades under their own private corporation. The company attempted to paint them as “independent” contractors. However, the court reached the logical conclusion that the plaintiffs were wholly dependent in their financial relationship with the company.  In conclusion, the judge upheld their “dependent” contractor status, awarding them 26 months of income, the highest ever compensation for wrongfully dismissed contractors in Ontario.

Bill 148: Fair Workplaces Better Jobs Act

For well over 35 years, our lawyers have fiercely advocated for the rights of Ontario workers. Therefore, we celebrated the passing of Bill 148 on Nov. 22, 2017. In order to solidify the rights of workers in non-traditional employment relationships, such as the commission sales agents and dependent contractors we have defended, the Ontario government has finally enacted a number of amendments to the ESA.

Section 5.1 now prohibits employers from intentionally mislabeling workers as independent contractors. Furthermore, employers, not workers, will bear the burden of proof for justifying the classification of their workers as dependent or independent contractors. The ESA will consider it an offense when employers wrongfully classify their workers and such employers risk prosecution by the Ministry of Labour.

These upgrades are welcome changes for Ontario workers. The rules around misclassification, burden of proof and penalties for abusive employers will, most of all, properly equip our courts to uphold fundamental rights of Ontario workers. Finally, commission sales agents and dependent contract workers will receive clear protection of their employment status. And we are extremely proud of the role we played to make this possible.

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