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Posted on February 21st 2006 in Legal Articles

Terminating Independent Contractor Agreements

Terminating Independent Contractor Agreements

In today’s fast paced and ever-changing business world, employers have begun to rely more and more on independent contractors. Aside from the obvious advantages of the employer not having to remit taxes and various premiums, one benefit of this arrangement is the ease with which it can be ended – maybe!

Employers generally associate reasonable notice and severance with the termination of an employee’s services, rather than those of an independent contractor. However, several recent court cases have begun to blur this distinction by applying employment law principles and remedies, such as reasonable notice, to independent contractor relationships.

The following cases involved the termination of what could be characterized as independent contractor relationships.

The Reebok Case
Marbry Ltd. entered into an oral agreement with Reebok, whereby the latter granted the former the exclusive right to sell Reebok athletic footwear and clothing in the Province of British Columbia. As part of the agreement, Marbry was required to maintain a showroom containing an inventory of demonstration products; conduct product knowledge sessions for Reebok customers retail sales staff; and assist Reebok in tracking down counterfeit Reebok products.

In part because of the efforts of Marbry, the Reebok product line greatly increased its market share in British Columbia. Eleven years after the original agreement, Marbry, at the request of Reebok, agreed not to take on any other non-Reebok product lines. Even before this request, the sale of Reebok products amounted to approximately 75% of Marbry’s total sales. A month after the request, Reebok terminated the parties’ agreement on one month’s notice.

The court concluded that the relationship between Marbry and Reebok was more akin to employee/employer than that of independent contractor or strict agency. As a result, Marbry was entitled to nine months notice of the termination.

The factors that the court considered significant included the duration and permanency of the relationship, the degree of reliance and closeness of the relationship between the parties, the high degree of exclusivity of the relationship and the degree of control that Reebok had over Marbry.

The Centennial Case
Aqwa and Centennial entered into an agreement, whereby Aqwa agreed to work as a commissioned salesperson for Centennial. The agreement included a provision that either party could terminate the agreement at any time without notice or penalty.

Despite this clear termination clause and Aqwa’s understanding of what he had signed, the trial judge concluded that Aqwa was entitled to reasonable notice upon termination by Centennial. His conclusion was based on the unequal bargaining positions at the time the agreement was made, and the lack of what he referred to as “mutuality” in the effect of the termination provision.

The Ontario Court of Appeal disagreed with the trial judge. The appellate court found that the parties’ agreement was not unconscionable or unfair and therefore it should be upheld. As a result, Centennial had been within its rights to terminate the agreement with no notice.

Two somewhat similar cases, two very different results. However, both offer some important lessons, including:

• Do not assume that because you have entered into an independent contractor relationship that it can automatically be terminated without notice.

• While oral agreements are legally binding, written agreements are better and more certain.

• It is important to include a clear and unambiguous termination provision in your independent contractor agreements. The provision should set out the grounds for terminating the agreement as well as the amount of notice that must be given.

• Get the assistance of an experienced business lawyer to draft your independent contractor agreement and to work to validate the classification through advanced rulings from the CCRA and the WSIB.

• If you are hiring an independent contractor, encourage that person to review the agreement with a lawyer.
o The more an independent contractor is treated like an employee, the more likely that he or she will be entitled to reasonable notice in order to terminate the relationship.

• Ideally, independent contractor agreements should have clear start and end dates. Encourage the independent contractor to seek out other sources of work.

While most situations involving independent contractors will be obvious, there will be times where it will not. In those situations, you are best to seek professional advice.

We can assist you to draft independent contractor agreements as well as provide advice on the termination of such agreements. If you would like to discuss your particular work force or if you would like further information, please contact either Howard Steinberg or Craig Colraine. 1