Formation

The party asserting a valid agreement must show that a mutual consensus has been concluded by which all critical parts have been agreed. The typical rules of offer, acceptance and consideration, needless to say, apply.

The issue of consideration takes on particular significance in the employment context in circumstances in which new contractual terms are subsequently introduced.

A court will examine the circumstances of the respective communications to determine if and when the parties have reached a mutual consensus on the essential components of the working relationship. These significant parts will likely include position, compensation, starting date and location.

Even if there is a further document contemplated, which has yet to be completed and executed, a contract on the facts may still be established.

The Supreme Court of British Columbia considered this issue in Kirby v Amalgamated Income Limited Partnership, a 2009 decision of Metzger J. in which the court found that an agreement had been proven, even though it had yet to be committed to paper. The essential components, the Court concluded, had been agreed:

An agreement between two parties to enter into an agreement by which “some critical part of the contract matter is left to be determined is no contract at all”: May & Butcher Ltd. v. The King, .....

[54]           However, agreements to agree must be “differentiated from others where there is a possibility that the parties may have reached a final agreement, even though some additional formality is envisaged”: ......That is, an agreement is “not unenforceable simply because it is oral and further documents are contemplated”: ...

[55]           Lord Tomlin said the following in Hillas & Co., Ltd. v. Arcos, Ltd...

… the problem for a court of construction must always be so to balance matters that, without violation of essential principles, the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains.

When Was the Contract Made?

Frequently, the time when the contract has been formed will become a very important factor when considering the enforceability of subsequent terms.

The issue often becomes whether the subsequent topics are seen as a continuum of the negotiation of the initial agreement, in which event fresh consideration is not required, or alternatively, an amendment to the finalized agreement and hence vulnerable to the defence of want of value being provided to create a binding contractual amendment.

A second common argument becomes whether the later terms offered, after the establishment of the initial contract were merely “incidental” and hence not consideration for the newly added controversial term or conversely were substantive and hence sufficient consideration to support the new provision.

Both submissions start with a necessary finding of when and whether the first contract was formed. These issues are discussed below in the Consideration chapter.

Compensation Missing

Certain fact situations have arisen in which the parties have commenced an employment relationship, or continued one after the lapse of the written contract. Where the compensation has not been settled or all aspects of such have not been agreed, the court will set a fair salary or other form of remuneration based on the concept of quantum meruit. ¹ Such was done in the Alberta Court of Appeal in its 2012 decision of Herman v First Capital:

The finding that there was no binding agreement does not end the matter. Where services are provided by agreement, but the remuneration is not settled, it has long been the law that the employee is entitled to a quantum meruit: .... Even if there was no binding contract, the appellant is entitled to fair compensation for the services he actually provided.

The words “the finding that there was no binding agreement” must, of course, be read in the context that there was an ongoing working relationship in place, as reflected in the following sentence.

A similar conclusion was reached by the Supreme Court of B.C in Sutherland v Townley. The court found that the parties had agreed in concept that the plaintiff would be entitled to an equity interest, the details of which were not mutually agreed. For this reason, the court found that there was no enforceable agreement on the subject of compensation, requiring that the court use the concept of quantum meruit to define the sum due under the employment relationship.

The same conclusion was reached in the Ontario Superior Court decision of Lipari v Ecolosite. In this decision, it was found that the parties had not reached a consensus on the issue of the bonus to which he was entitled. Quantum meruit again saved the plaintiff:

When the plaintiff joined the defendant, he did so for a salary that was substantially less than the remuneration he had been paid by his previous employer.  It was clearly contemplated by both parties that his annual salary would be supplemented by a bonus.  Since there was no agreement on the calculation of the bonus, the task is to determine what the plaintiff’s entitlement should be on a quantum meruit basis in the circumstances.

Real World Interpretation

Often both parties with apparent mutual agreement elect to describe a relationship, which is clearly one of employment, as one of a consulting or other commercial arrangement.

The law on the subject demonstrates that a court will examine the business reality of the relationship to determine whether there is a de facto employment relationship. The leading case on this subject is the Supreme Court of Canada decision in 671122 Ontario Ltd. v Sagaz.

The case involved the determination of employment status as an issue in the argument of vicarious liability, as a finding of an employment relationship would have been most beneficial as a stepping stone to the establishment of vicarious liability.

The Supreme Court concluded that although there was no direct path to the answer, the accepted popular test was set out as below. The reference below to the views of MacGuigan J.A. is to a tax case, Wiebe Door Services Ltd v MNR, 87 DTC 5025.

Although there is no universal test to determine whether a person is an employee or an independent contractor, I agree with MacGuigan J.A. that a persuasive approach to the issue is that taken by Cooke J. in Market Investigations, supra.  The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account.  In making this determination, the level of control the employer has over the worker’s activities will always be a factor.  However, other factors to consider include 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 his or her tasks.

The language which the parties may have chosen to define their relationship will not be determinative of the court’s finding. A vivid example is the decision of the Tax Court in Dave Livingstone Trucking v MNR in which the Court concluded that the reality of the relationship was employment and upheld the decision to order Employment Insurance and Canada Pension Plan premiums be paid.

The Ontario Court of Appeal came to the same conclusion in its 2008 decision of Braiden v La-Z-Boy in which the court confirmed that the names the parties assign to their relationship will not be determinative of judicial outcome. Gilesse J.A. stated in the unanimous decision:

  In Belton, as in the present case, this court was required to determine whether a commissioned sales representative was an independent contractor or employee.  The court reiterated that a statement in an agreement that purports to establish the nature of the relationship is not determinative of the issue.[3]  Despite a statement in the agreement between the parties that the sales representatives were independent contractors, this court concluded that the sales representatives were employees.  In reaching that conclusion, Juriansz J.A, writing on behalf of the court, considered five principles which had been modelled on the considerations set forth in the above quotation from Sagaz:[4]

Relying on Doyle v. London Life Insurance Co. ² the trial judge identified the following principles to distinguish independent contractors from employees when considering the status of a commissioned agent:

1.    Whether or not the agent was limited exclusively to the service of the principal;

2.    Whether or not the agent is subject to the control of the principal, not only as to the product sold, but also as to when, where and how it is sold;

3.    Whether or not the agent has an investment or interest in what are characterized as the “tools” relating to his service;

4.    Whether or not the agent has undertaken any risk in the business sense or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission;

5.    Whether or not the activity of the agent is part of the business organization of the principal for which he works.  In other words, whose business is it?   [Emphasis added.]

[34]          In many ways, the question posed at the end of the fifth principle – whose business is it? – lies at the heart of the matter.  Was the individual carrying on business for him or herself or was the individual carrying on the business of the organization from which he or she was receiving compensation?  In my view, given the findings of the trial judge, the answer to that question can only be that Mr. Braiden was carrying on the business of La-Z-Boy.

An Accident Waiting to Happen

This decision is one fraught with risk and subsequent turmoil, should it be determined that the reality of the enterprise is one of employment.

Such an improvident decision may expose the employer to an array of chaos, including uncollected source deductions of tax, CPP and EI payments, vacation, holiday and other statutory payments. In addition, there may be other employment standards obligations which are missed, the termination clause will be subject to the requirement to satisfy the statutory minimum and hence the employer may risk exposure to common law notice obligations. Also, the employer may be re-assessed for workers’ compensation premiums.

Conversely, the employee’s tax position may be reviewed and claims made for allowable business expenses may be denied and the past returns re-assessed.

Employment status may also be significant for issues such as claims for arrears of salary against directors personally, ownership of copyright for works completed in the course of employment, the unjust dismissal remedy under the Canada Labour Code, human rights remedies, the right to sue for a workplace accident due to the Workplace Safety and Insurance Act, or vicarious liability as revealed in the leading case of Sagaz as discussed subsequently.