Just because an individual is characterized as an independent contractor rather than an employee, that does not mean that a company can terminate their contract early without any notice. In particular, terminating a fixed term contract can result in significant liability for the company, even when that contract is for an independent contractor rather than an employee.
Elder v. Max Wright Real Estate
The recent Court decision in Elder v. Max Wright Real Estate outlines the legal issues of terminating an independent contractor’s fixed term contract, as well as the difficulty in calculating wrongful dismissal damages in the case of a commissioned real estate broker.
The Facts
The plaintiff Mr. Elder worked as a real estate agent for Sotheby’s Realty. He was initially hired on a one year fixed term contract, which was extended for an additional year. Sotheby’s terminated the contract with 11 months remaining on its term.
The parties agreed that Mr. Elder was a contractor rather than an employee, but disagreed on whether he was a dependent contractor, as Mr. Elder alleged, or an independent contractor, as Sotheby’s alleged. The Court ultimately found that this issue did not need to be determined, as his damages were the same in either case.
The contract between the parties contained a termination clause which allowed either party to terminate the contract “at any time with written notice to the other party”. Sotheby’s relied upon this clause to argue that it was entitled to terminate the contract without any advance notice. The Court disagreed, and found that the termination clause required Sotheby’s to provide advance notice, which in this case was the period of time remaining on the one-year term.
Six days after being dismissed from Sotheby’s, Mr. Elder obtained a new position with Engel & Volkers as a real estate agent, but argued that his earnings at his new position were less than what his earnings would have been with Sotheby for the 11 months following his dismissal.
The Law on Fixed Term Contracts
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, unless there is a valid termination clause. The question of whether the non-terminating party has a duty to mitigate their damages will depend on whether that party was an employee or an independent contractor.
Employee-Employer Relationship
In the case of an employment relationship that is subject to a fixed term contract, the employee will not have any duty to mitigate their damages by seeking replacement employment during the remainder of the fixed term. Similarly, any income earned during the fixed term would not be deducted from the damages payable to the employee. This principle was held by the Ontario Court of Appeal in Bowes v. Goss Power Products Ltd. and Howard v. Benson Group Inc.
Independent Contractor Relationship
However, in the 2023 Court of Appeal decision of Monterosso v. Metro Freightliner Hamilton Inc., the Court clarified that the above principle does not apply in the case of an independent contractor relationship. An independent contractor who is subject to a fixed-contract will have a duty to mitigate their damages, and all income they receive during the notice period will be deducted from the damages payable to them.
The Court’s Decision
In applying the above case law, the Court in Elder v. Max Wright Real Estate determined that Mr. Elder was entitled to damages equal to what he would have earned during the 11 months remaining on the fixed term of the contract, but that such damages must be reduced by the amount Mr. Elder received from Engel & Volkers in the same period.
Calculating such damages was somewhat challenging for the Court. Pay in lieu of notice is far easier to calculate for a salaried employee, but is more difficult for a commission-based role like Mr. Elder’s. The Court was required to determine how much Mr. Elder would have earned in the next 11 months, which can be different from how much he earned in the previous 12 months.
Each side proposed a different formula for making the calculation. Ultimately, the Court started with Mr. Elder’s average monthly earnings, and reduced this by 45% based on evidence that the real estate market had declined during that period, and that Mr. Elder’s earnings would have suffered a corresponding reduction. From that amount, the Court deducted Mr. Elder’s actual earnings from Engel & Volkers during the 11-month period, resulting in total damages of $21,034.01. In addition, the Court awarded Mr. Elder legal costs of $25,000.00, being more than the amount awarded to him as damages. While it is fairly common to use a two or three year average of earnings, it is open to either party to submit evidence of what the actual earnings would have been during the notice period.
Conclusion
Whether you are an employer or an employee, this case demonstrates the need to seek legal advice when entering into a contract and when a contract is terminated. Even if the relationship is that of an independent contractor, and even if there is a termination clause that purports to limit the required notice period, the company may face liability that it did not expect.
If you have any questions about your situation or if you would like to get legal advice, please feel free to contact us.
