Tax & Trade Blog
DIRECT SELLING INDUSTRY: Contractors or Employees?
Canada is often viewed as a natural extension of the American direct selling ecosystem: it has a common dominant language, similar culture, convenient land border, and a market of over 38 million people!
While there are many similarities, there are still unique legal and regulatory features that direct selling businesses operating in Canada must be aware of and adapt to — all of which can be easily avoided with the right planning, structuring or advice. This includes the appropriate “Canadianization” of plan documents and overall business strategies.
In the fifth of a 5-part series, we review one of the major risk areas facing the Canadian direct selling industry:
The Employee or Independent Contractor Issue
The “non-employee” status of independent distributors and sales representatives is less certain in Canada that it is in the United States and remains a particularly Canadian issue.
This is largely because Canadian direct selling companies do NOT have the benefit of the IRS’s special deeming rule in 26 USC 3508 (which deems the Companies distributors and sales representatives to be independent contractors for income tax purposes.)
Recent Canadian Jurisprudence
A recent Canadian judicial decision in the Desjardins Case services shows the risks in this area for Canadian direct selling companies using only a non-negotiable standard “you are an independent contractor” clause for dealing with these issues.
The Tax Court found that an individual working for Desjardins (a large Canadian banking chain) was an employee and not an independent contractor based, in part, on the fact the contract was not negotiated (i.e., it was a standard form contract) and that the individual had an obligation to work exclusively for the appellant, Desjardins. It unfortunately took until Desjardins appealed to the Federal Court of Appeal to turn the case around!
How Can this Possibly Affect Me?
Enforcement action in this area can come with inquiries from the Canada Revenue Agency (perhaps looking for Employment Insurance (EI) or Canada Pension Plan (CPP) premiums to be collected and paid by the Company on Distributor and Rep earnings), from provincial Employment Standards Officials (perhaps after a former rep files a complaint looking for “minimum wage”, “training pay” or “vacation pay” entitlements under that provincial legislation), or even under Provincial Workers Compensation legislation (looking for payment for alleged “on-the-job” injuries).
Then there is the dreaded – but clearly possible – “class action” that was launched, for example, in Ontario by Uber drivers claiming that they were employees and seeking $400 million in damages! (See, in Heller v. Uber Technologies, the subject of our prior blog here.)
When these inquiries come, they often require material resources to resolve, both internally (read: much of YOUR time and attention) and externally (read: expensive legal assistance).
Given the potentially disastrous consequences of a government entity finding that a company’s distributors are actually “employees” of the Company and not independent contractors, the Canadianization of the Rep / Distributor Agreements for this particular issue is always a must!
Issues like control, ownership of tools, risk of loss, chance of gain and integration all need to be expressly addressed in Canada and need to be addressed in a commercially sound matter, usually requiring careful legal drafting.
Do you require assistance in this area? If so, please click here.