Employee or contractor? Mischaracterizations can be costly

This article appears in the Fall 2020 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

Moving up the ranks of a company is generally viewed as a good thing. For investment advisors, this could mean starting out as a rookie, moving to a senior advisor position and eventually into management. Such a route, however, can have its drawbacks, particularly if the person leaves the company on less-than-friendly terms.

Such was the case for two former advisors of Winnipeg-based Investors Group Financial Services who are suing the company for wrongful dismissal, and asking for more than $10 million, after working at the firm for almost 20 years. The suit, which focuses on how the ex-advisors’ job descriptions as independent contractors are a “mischaracterization in law,” is one in a string of cases outlining the changing dynamics of work — both in the evolving world of financial services and more broadly.

“This conundrum — whether somebody is an employee or independent contractor — has been permeating in the legal community for many, many years, and the tests have been well established,” says Nancy Shapiro, a partner with Toronto-based Koskie Minsky, and legal counsel for the plaintiffs.

“It boils down to who has control over the working relationship,” she says. That is, who defines the work — the individual or the company?

Another factor considered by the court in determining the nature of the working relationship is the risk of profit or loss. In other words, is it within the person’s power to make more (or less) income based on how much they work or produce?

In a statement of claim, the advisors’ case is described as follows: the plaintiffs, Jamie Vermeeren and Ermos Erotocritou, were hired by Investors Group as consultants in 2000. They were promoted to branch managers in 2003 and 2004, respectively, and then to regional directors — Vermeeren for the Fraser Valley region in 2006, and Erotocritou for midtown Toronto in 2010. They allege that their contracts were terminated abruptly after they raised concerns about changes to their work relationship with Investors Group and their compensation.

The plaintiffs’ employment contracts were terminated without notice — or payment in lieu of notice — as their contract with Investors Group, which they signed as consultants in 2000, designated them as independent contractors. The plaintiffs argue that designation is a mischaracterization in law and that they’re entitled to the termination benefits offered to employees.

“By using this mischaracterization of the employee versus contractor, we’re trying to challenge the structure on which Investors Group premises its business operations,” says Shapiro.

In an emailed statement, Investors Group said: “We disagree with the position put forward by the plaintiffs and will be vigorously defending the action.”

The issue of how advisor employment is classified is not unique to IG, and this isn’t the first time an advisor’s working relationship to a financial institution has been tested in court. In 2016, Toronto-based BMO Nesbitt Burns reached a $12.5-million settlement, including costs, in an overtime class action. Another case regarding a former insurance advisor with Quebec City–based Industrial Alliance Insurance and Financial Services went to the Supreme Court of Canada in 2018 (see “Related cases”).

In some ways, the court cases are quite distinct. The BMO class action was litigated based on the Ontario Employment Standards Act and is focused on overtime; the suit against IG is based in common law and focused on wrongful dismissal.

But both cases raise the potential mischaracterization or misclassification of the advisor role.

Joel Smith, a lawyer with Markham, Ont.-based Williams HR Law, says awareness of legal entitlements related to employment is growing.

“It’s just so easy with all of these resources online such as legal blogs,” says Smith. “People are understanding what their entitlements are and they’re challenging more than they ever did before.”

Financial firms should think carefully about the kind of working relationship they want to have, and analyze the costs associated with employees versus contractors. Firms also need to ensure the contract signed by an individual properly reflects — and continues to reflect — the designated relationship, and that the Ministry of Labour and the courts would recognize that relationship as defined in the contract.

“Firms are taking big chances if they choose to not comply and … be creative in the way they set up their relationships,” says Shapiro.

As stated above, the employment classification typically hinges around control: Who has control over the advisor’s business, and when and how they work?

“There’s a real tension, especially with financial services, with the issue of having control,” says Andrea Sanche, a partner with Toronto-based Ricketts Harris. “Because there’s so much regulation, companies have to have so many policies in place.”

According to Ontario employment law, there are generally three categories of worker relationships: independent contractor, dependent contractor and employee. Each category has its own set of benefits and entitlements.

Independent contractors have complete control over when and how they work, but they don’t have any entitlements. On the other end of the spectrum are employees, who have no control over when and how they work but who receive entitlements such as health benefits and notice of termination. In the middle are dependent contractors, who don’t receive the full range of benefits as employees but are entitled to notice of termination.

“It’s a spectrum and just a matter of where you fit,” says Smith.

Of course, there’s still “room for creativity,” he adds, meaning organizations and workers can come up with different models and try to fit them along this spectrum.

Defining employment relationships in the initial contract is crucial and the onus is on the company to make sure it’s done right, Smith says. Some organizations and workers want an independent contractor relationship — at least initially — because it involves a lower tax bill. However, the law does not prohibit an individual from “shifting gears,” he says, if the contract is terminated and they feel they’re entitled to notice or other benefits.

Establishing the employment relationship a certain way doesn’t guarantee the law will view it as such, Smith says. Failure to properly structure relationships could lead to costly consequences.

For example, companies need to consider the legal obligations that come with an employee relationship, such as the requirement to remit income taxes, employment insurance and Canada Pension Plan contributions, as well as to make matching contributions to these benefits.

Advisors also have cost-related issues to consider about their working relationship. For example, if they have been reporting their taxes to the Canada Revenue Agency as an independent contractor and have been writing off work-related expenses, the agency may reassess them should the advisor claim to be an employee of the company at the time of termination.

The franchise question

In the Investors Group case, lawyer Nancy Shapiro suggests the plaintiffs may have been operating as a franchise. As regional directors, the plaintiffs participated in the Regional Director Assured Value Program, which mandated that they “buy in” to their regions based on what Investors Group determined to be its “assured value,” which is determined based on the regional director’s annual net income and asset income.

The plaintiffs paid 240 semi-monthly installments as regional directors. If the value of their regions increased, the plaintiffs were told they would be paid the difference over a 10-year period after leaving Investors Group. That 10-year period was changed to 15 and, to ensure payment, the plaintiffs have to follow a number of rules, such as not seeking employment in the financial services industry for 15 years following their departure from the company.

The plaintiffs effectively “bought a business; they bought a region,” Shapiro says. If they were operating an IG franchise, “there would be a whole different rulebook for that.”

That “rulebook” comes from the Arthur Wishart Act (Franchise Disclosure), which came into effect in Ontario in 2000. The act requires franchisors to provide prospective franchisees with a disclosure document outlining details, including fees and conditions of termination.

Investors Group said in an emailed statement that it disagrees with the plaintiffs’ position and would “vigorously” defend the action.

Related cases

Mazraani v. Industrial Alliance Insurance and Financial Services Inc.

In 2012, Industrial Alliance (IA) terminated the position of insurance agent Kassem Mazraani. Mazraani asked the Canada Employment Insurance Commission to consider his employment status as that of an employee so that he could receive unemployment benefits. The commission refused to do so, and its decision was upheld by the Canada Revenue Agency. When Mazraani appealed to the Tax Court of Canada (TCC), IA became involved in the proceedings as the outcome could affect the company’s business model. During the proceedings, IA witnesses and lawyers were told to speak in English despite stating a preference to converse in French. The TCC judge decided in favour of Mazraani, meaning he should be considered an employee.

In 2018, the Supreme Court of Canada ruled that the Tax Court must hear the case again based on a violation of language rights.

Rosen v. BMO Nesbitt Burns Inc.

In 2016, BMO Nesbitt Burns reached a $12.5-million settlement (including costs) in a class action involving overtime pay for investment advisors.

The lead plaintiff, Yegel Rosen, worked for Nesbitt Burns between 2002 and 2006, first as a trainee and then later as an investment advisor. Rosen stated that the management team encouraged him to work overtime and that he averaged about 60 to 80 hours per week. In the class action, Rosen’s lawyers argued that he, and other class members, were entitled to overtime pay because they did not fit into the two exemptions outlined in the Employment Standards Act: if the employee’s work is “supervisory or managerial in character”; and if there is a “greater benefit,” such as compensation from commissions. Nesbitt Burns did not admit to any liability as part of the settlement but did implement an overtime pay policy for the six-month supervision period of trainees.

Fulawka v. Bank of Nova Scotia

Cindy Fulawka, the lead plaintiff in this class action, worked for Scotiabank in Saskatchewan and Ontario for almost 20 years, mainly as a personal banker. The case was an example of “off-the-clock” overtime: the members alleged that the bank’s overtime policies required them to obtain approval for overtime even though such work was done without said approval.

As part of the settlement, personal banking officers, senior personal banking officers, financial advisors and account managers for small businesses could claim unpaid overtime going back 13 years, depending on the province. In 2016, a second settlement was finalized bringing the total amount paid to approximately 1,600 claimants to $39.3 million. Scotiabank also agreed to pay $12.5 million in legal fees.