Economics Labor Law

Is the “Dependent Contractor” Model the Future of the Gig Economy?

Ever since the rise of Uber, there has been quite a healthy debate about the distinction between an employee and a contractor. In almost all the U.S. writing on this topic, the term contractor is used generically to refer to all non-employee workers, but as everyone knows there are many kinds of contractors. It is quite a different thing for someone to work a few extra hours a week for Uber, while holding other jobs, than it is for someone to work 50+ hours a week only driving for Uber. Up to know, that distinction has not been a major part of most articles on this topic, but a Canadian court case suggests this omission might change in the future.

The case to which I refer, McKee v. Reid’s Heritage Homes Ltd., was argued in 2009. In that case, a female real estate agent who had worked under a “sales and advertising agreement” was terminated after a seven-year commercial relationship. She sued for wrongful dismissal after refusing to accept changes to her contract that would have lowered her income.

Justice John R. Bellegem of the Ontario Court of Appeals ruled in favor of Elizabeth McKee, deciding that she was a de facto employee, but the judgement laid out a novel distinction in the published decision. In presenting his logic, Justice Bellegen noted that there are two kinds of contractors: dependent and independent. The basis for this part of the McKee ruling was a literal reading of the term dependent. In Bellegen’s opinion, if a worker relies primarily on one company for her livelihood, then she is not an independent contractor; rather, she is “dependent” on that company for her livelihood and thus is entitled to a status much closer to that of a full-time employee. If the worker relies on multiple sources for her income, can she can readily be categorized as an “independent” worker. It’s important to note that the Bellegen did not create a third type of company-worker relationship — he split the contractor relationship into two kinds.

The McKee ruling was put to use in a 2011 Alberta case called Drew Oliphant Professional Corporation v. Harrison. In this case, a chiropractor named Drew Oliphant sued his former employer for many reasons, including, again, for failure to provide adequate notice of termination. As in McKee, the Court agreed with Oliphant’s claim of wrongful termination, basing its conclusion in part Bellegen’s concept of a dependent contractor:

The law is well settled that notice is required for termination of a employment contract, whether the termination arises at the behest of the employer or the employee. Conversely, the law is clear that, absent a provision to the contrary, a contact for services by an independent contractor can be terminated at will and without notice. In recent years, a third category has developed, in which the party contracting is considered a “dependant contractor”. In those cases notice of termination is required notwithstanding the absence of an employment relationship.

In ruling for the plaintiff, Justice K. M. Horner refined the idea of first presented in McKee even further, laying out three conditions that need to be examined in order to determine dependency:

(i) Duration/Permanency of the Relationship. The longer the duration of the relationship or the more permanent it is militates in favour of a reasonable notice of requirement. Amongst other evidence, the purchase and maintenance of inventory, which contains a permanency aspect, should be considered:

(ii) Degree of Reliance/Closeness of the Relationship. As these two inter-related sub-factors are increased the more likely it is the relationship falls on the employer/employee side of the continuum. Included in this factor is whether the sale of the Defendants products amounted to a significant percentage of the Plaintiffs revenues:

(iii) Degree of Exclusivity. An exclusive relationship favours the master/servant classification.

A 2014 post on the blog of DLA Piper, written by Michael D.A. Ford Q.C., goes on to note that: “While none of these factors by themselves justify the finding of a dependent contractor relationship, the presence of a combination of these factors may substantiate such a claim.”

Returning to the case of Uber, the Oliphant ruling provides an interesting lens through which to look at any Uber driver. I can well imagine a court in a liberal state ruling that, if a driver spends more than half of his time working for Uber, then he should be a dependent contractor, if not an actual employee. Perhaps to be an employee, a driver would have to work 80%+ of his hours for Uber. Interestingly, a 2015 study published by Princeton’s  Alan Krueger and Uber’s Head of Policy Research, Jonathan Hall, noted that about 45% of Uber drivers work more than 15 hours a week. After looking at the data own their report, an exact number is hard to gauge, but I think about 30% of driver would meet the theoretical dependent contractor/employee thresholds noted above.

I would be surprised if lawyers in the U.S. are not already importing the Canadian logic into their litigation against Uber. Perhaps, though, for Uber, Lyft, DoorDash and other gig economy companies, it would be a good idea to embrace the dependent contractor model as a compromise between the current employee-contractor positions. Indeed, in this month’s Wired, Jessi Hempel makes a similar point:

…some legal experts advocate a third regulatory category for workers in which they’d be responsible for some costs (like, say, making payments into a worker’s compensation fund) but not others (like health care contributions).

Hempel, who has covers the gig economy regularly, is on the right track, especially since I am sure that many governments will come down on the side of the employee designation sooner or later for on-demand workers. Perhaps by accepting the dependent contractor model these new companies will find a mid-point that they can live with. Of course, doing so would lead to many legal challenges debating issues such as degree of dependency and other factors that will emerge if the concept gains wider acceptance.

I am not sure how this will play out, but I think that the dependency concept is an idea we will be hearing about more and more as the on-demand/gig economy continues to evolve.


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