Date: 20000128
Docket: 98-41-CPP
BETWEEN:
POLIMARK LTD.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
PORTER, D.J.T.C.C.
[1] This appeal was heard at Calgary, Alberta, on December 13, 1999.
[2] Polimark Ltd. (hereinafter called the "Appellant") has appealed the decision of the Minister of National Revenue (the "Minister") dated December 11, 1997 which confirmed an assessment for Canada Pension Plan contributions in the amount of $691.88, plus applicable penalty and interest for 1996. The reason given was:
"... This is because Barbara Wadolna and Ryszard Witek were employed under a contract of service and therefore were employees."
The decision was said to be issued pursuant to subsection 27(2) of the Canada Pension Plan (the "Plan") and was based on paragraph 6(1)(a) of the Plan.
[3] The established facts reveal that at the material time, the Appellant operated a travel and insurance services agency. Prior to April 1, 1996, Barbara Wadolna and Ryszard Witek (the "workers") worked undisputedly as regular employees in that agency. From that date their working arrangements were changed so that they worked from their homes and were paid on a commission basis in relation to their respective sales. The Appellant has maintained that in this latter capacity, they were working as independent contractors under contracts for services and were thus not employees. The Minister has decided that they were employed under contracts of service and were thus employees. That then is the issue.
The Law
[4] The manner in which the Court should go about deciding whether any particular working arrangement is a contract of service and thus an employer/employee relationship or a contract for services and thus an independent contractor relationship, has been clearly laid out by the Federal Court of Appeal in Wiebe Door Services Ltd. v. M.N.R., 87 DTC 5025. The test to be applied has been further explained by that Court in Moose Jaw Kinsmen Flying Fins Inc. v. M.N.R., 88 DTC 6099. There are, following these cases, numerous decisions of this Court, some of which have been cited by counsel, which demonstrate how these appellate guidelines have been applied. In the Moose Jaw Kinsmen Flying Fins Inc. case, above, the Federal Court of Appeal said this:
"[Analysis]
The definitive authority on this issue in the context of the Act, is the decision of this Court in Wiebe Door Services Ltd. v. The Minister of National Revenue, 87 DTC 5025. MacGuigan J. speaking on behalf of the Court, analyzed Canadian, English and American authorities, and, in particular, referred to the four tests for making such a determination enunciated by Lord Wright in City of Montreal v. Montreal Locomotive Works Ltd., [1974] 1 D.L.R. 161 at 169-70. He concluded at page 5028 that:
Taken thus in context, Lord Wright's fourfold test [control, ownership of tools, chance of profit, risk of loss] is a general, indeed an overarching test, which involves "examining the whole of the various elements which constitute the relationship between the parties". In his own use of the test to determine the character of the relationship in the Montreal Locomotive Works case itself, Lord Wright combines and integrates the four tests in order to seek out the meaning of the whole transaction.
At page 5029 he said:
...I interpret Lord Wright's test not as the fourfold one it is often described as being but rather as a four-in-one test with emphasis always retained on what Lord Wright, supra, calls "the combined force of the whole scheme of operations," even while the usefulness of the four subordinate criteria is acknowledged.
At page 5030 he had this to say:
What must always remain of the essence is the search for the total relationship of the parties.
He also observed "there is no escape for the trial judge, when confronted with such a problem, from carefully weighing all the facts."
...like MacGuigan J. we view the tests as being useful subordinates in weighing all of the facts relating to the operations of the Applicant. That is now the preferable and proper approach for the very good reason that in a given case, and this may well be one of them, one or more of the tests can have little or no applicability. To formulate a decision then, the overall evidence must be considered taking into account those of the tests which may be applicable and giving to all the evidence the weight which the circumstances may dictate."
[5] The nature of the tests referred to by the Court can be summarized as follows:
a) The degree or absence of control exercised by the alleged employer;
b) Ownership of tools;
c) Chance of profit and risk of loss;
d) Integration of the alleged employee's work into the alleged employer's business.
[6] I also take note of the further words of MacGuigan J., in the Wiebe case, above, where he approved the approach taken in the English courts:
"Perhaps the best synthesis found in the authorities is that of Cooke J. in Market Investigations, Ltd. v. Minister of Social Security, [1968] 3 All E.R. 732, 738-9:
The observations of Lord Wright, of Denning L.J., and of the judges of the Supreme Court in the U.S.A. suggest that the fundamental test to be applied is this: "Is the person who has engaged himself to perform these services performing them as a person in business on his own account?" If the answer to that question is "yes", then the contract is a contract for services. If the answer is "no" then the contract is a contract of service. No exhaustive list has been compiled and perhaps no exhaustive list can be compiled of considerations which are relevant in determining that question, nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases. The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors, which may be of importance, are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk be taken, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task. The application of the general test may be easier in a case where the person who engages himself to perform the services does so in the course of an already established business of his own; but this factor is not decisive, and a person who engages himself to perform services for another may well be an independent contractor even though he has not entered into the contract in the course of an existing business carried on by him."
[7] To this I would add the words of Décary, J.A. in Charbonneau v. Canada (M.N.R.) [1996] F.C.J. No. 1337, where speaking for the Federal Court of Appeal he said this:
"The tests laid down by this Court ... are not the ingredients of a magic formula. They are guidelines which it will generally be useful to consider, but not to the point of jeopardizing the ultimate objective of the exercise, which is to determine the overall relationship between the parties. The issue is always, once it has been determined that there is a genuine contract, whether there is a relationship of subordination between the parties such that there is a contract of employment ... or, whether there is ..., such a degree of autonomy that there is a contract of enterprise or for services. ... In other words, we must not pay so much attention to the trees that we lose sight of the forest. ... The parts must give way to the whole."
The Facts
[8] In the Reply to the Notice of Appeal filed by the Deputy Attorney General of Canada on behalf of the Minister, the latter in coming to his decision was said to have relied upon the following assumptions of fact:
"(a) The Appellant is in the business of providing travel services and insurance services;
(b) the 100% shareholder of the Appellant is Adam Cichorski, ("AC");
(c) the Workers were hired by AC;
(d) the Workers' duties included:
(i) soliciting clients;
(ii) offering products for sale;
(i) invoicing;
(ii) travel consulting;
(iii) making travel arrangements;
(iv) preparing documents;
(v) pickups and deliveries;
(e) the Workers were paid on a commission basis;
(f) the Workers were paid 40% of the profit on their sales;
(g) the Workers were paid by the Appellant semi-monthly by cheque;
(h) the Workers were provided training by AC;
(i) although the Workers worked out of their respective homes, they were required to attend the Appellant's office regularly as the Appellant had a special computer system that the Workers were required to use;
(j) the Workers were required to turn over any payments they received from clients to the Appellant;
(k) AC allows the Workers 24 hour a day access to the Appellant's computer system;
(l) every sale the Workers made was required to be entered on the Appellant's computer system by the Workers;
(m) the Workers carried out all business and completed all transactions under the name of the Appellant;
(n) the commission from sales made by the Workers were directed to the Appellant who then paid the Workers;
(o) the Appellant charged the Workers a penalty for accounting errors;
(p) the Workers had to provide their services personally as their duties required specific skills and knowledge of the Appellant's software and computer system;
(q) the Workers had no investment in the Appellant's business;
(r) the Workers were not in business for themselves;
(s) the Workers carried out their duties throughout the 1996 year and their duties and conditions of employment did not change subsequent to April 1, 1996."
[9] The Appellant agreed with items (a) to (d), (f), (g), (h) (before April 1, 1996), (i) to (n) (commission was first paid to the company and then it paid the workers in turn), (o) (after April 1, 1996), and (q).
[10] The Appellant disagreed with items (e), (p), (r), and (s).
[11] Evidence was given on behalf of the Appellant by Adam Cichorski (AC) who was the president of and owner of 100% of the shares in the Appellant. He first explained the basis upon which the workers were paid. They knew the cost of each ticket which they sold, that is to say for example, the amount an airline would charge for a particular ticket. To this amount, they added the profit element which was then split 40%/60% between themselves and the Appellant. The amount of that profit element remained in their absolute discretion. The airline would then pay the agency which in turn would divide the profit element with the worker.
[12] The workers needed specific skills to do their work. They needed to understand the industry and they needed to understand the computer system established by the Appellant. Those skills, however, were the same before and after April 1, 1996. Other people could not do their work for them unless they understood the computer system. Theoretically, AC said, others could have done the work and made the entries for them. All their work would then be done under their respective passwords. In fact, that was not done, nor do I gather from the evidence that it would have been practically feasible for it to have been done as it would have involved access by strangers to the premises of the Appellant.
[13] The workers worked out of their homes doing their sales. However, they had to attend regularly at the office of the Appellant in order to put the entries into the computer system. They could not do that at the time of the sales from their homes.
[14] Apparently, Ryszard Witek operated under the trade name of Rover Import and Export. However, there was no evidence of the nature of that business or whether it involved anything other than work with the Appellant.
[15] Despite its claim that the workers were independent contractors, the arrangement between the company and the workers was that it would withhold taxes from their payments. In fact, it completed T4's for the entire year, which the witness stated was done in error.
[16] The witness said that before April 1, 1996, each of the workers worked regular hours at the office; for 8 hours starting at 9:00 a.m. each day. Ryszard Witek received a salary of $1,400.00 and Barbara Wadolna received a salary of $1,200.00 per month. The salaries were paid semi-monthly.
[17] After April 1, 1996, they wanted to make more profit. The commission structure was changed. The Appellant offered them an arrangement which the witness described as self-employed, whereby they could do what they wanted by way of time that they put in. They also took responsibility for their own errors. Sometimes there were mistakes which were costly and AC gave an example of an airline ticket which had been sold for an incorrect price to Warsaw, Poland. The worker had to reimburse the company for the shortage.
[18] Ryszard Witek quit in 1997 when the Appellant changed the system back to the old way, apparently after discussion with Revenue Canada. Barbara Wadolna stayed on and still works as a regular employee.
[19] The arrangement after April 1, 1996 was never set up in writing.
[20] It was the Appellant who negotiated the cost of the tickets with the airlines. The profit on tour packages was split between the workers and the company 50/50.
[21] That in substance was the evidence before the Court. The facts are not greatly in issue; rather it is the interpretation to be put upon the facts which is at issue. The parties' intent was apparently to provide for a type of independent contract for services. The Court, however, is not bound so much by their expressed intent as by the actual terms of the arrangements that they set up. The substance of the arrangements is more critical to the decision than the label which the parties choose to put upon them. The intent, in any event, is not evidenced by any written contract. Had there been a written contract in the absence of clear evidence that the substance was not the same as the intent, the Court might be inclined to give considerable deference to any clearly expressed intent. In the present circumstances, however, the parties must be considered to have intended to set up that which they did in fact set up. They may have hoped or thought that it would not fall into the category of a contract of service but that is now a matter of mixed fact and law to decide.
Application of the Four Aspects of the Test to the Facts
[22] Control: As pointed out by the Minister, all the transactions carried out by the workers were done in the Polimark name. There was no way to complete a transaction otherwise. The amount of profit was left to the discretion of the workers to negotiate. However, the processing of the sale had to be done in a set way through the Polimark computer system. The training had all been done previously by Polimark. The price of the tickets was negotiated between the airline and the Appellant and the worker had to respect that price. If they were short, they had to pay the difference from their own resources.
[23] The question of control is not so much the actual control exercised in any particular case, but rather the right to exercise control. Clearly the Appellant had the right to instruct the workers how they were to go about processing their sales, how and when they could access its premises, and how they could access its computer system. Although the workers enjoyed a certain measure of independence on balance, this aspect of the test favours an interpretation of contracts of service.
[24] Profit and Loss: The workers were paid on a commission basis. Commission was split between them and the Appellant. They had no expenses other than reimbursement for the company for mistakes made. They did not need a certain level of sales in order to break even. Their commissions increased with their sales, but they had no investment and profit was not available to them in an entrepreneurial sense. Similarly, they had no real fear of loss. If they did nothing, they received nothing, but they would not be losing money as would an independent business person.
[25] Again, this aspect of the test leans towards an employer/employee situation based on commission for sales.
[26] Tools: The basic tool was the computer system. It is true that the workers needed their own telephones at home, but apart from this, the principal manner of processing the sales, was through the computer system set up at the office of the Appellant. The workers had no investment in this. It is clear that the tools were principally provided by the Appellant and again, this aspect of the test favours an interpretation of a contract of service in each case.
[27] Integration: The question that has to be asked is "whose business was it?". That question has to be put from the point of view of the work being done by the workers. Clearly, although the commission or profit on the sales was to be split between the Appellant and the workers, the business was that of the Appellant. It negotiated the contracts with the airlines, it set up the computer system, it had the office, it received the commissions from the airlines, and was responsible to them for what took place with respect to tickets sold. The workers bore none of this responsibility, in that they had no relationship with any of the airlines or tour operators. In my view, the business was clearly that of Polimark and the work carried out by the workers was integrated into that business. There was no separate business of their own existent in the entrepreneurial sense. This aspect of the test also points to an employer/employee relationship as opposed to that of an independent contractor.
Conclusion
[28] At the end of the day, when I look, not just at the individual trees, all of which in my view bear the markings of contracts of service, but stand back and look at the whole forest, I see only a picture of an employment situation and not that of independent contractors. In my view there was not sufficient independence from the Company on the part of the workers to say that they were engaged by way of contracts for services.
[29] In the result the appeal is dismissed and the assessment of the Minister is confirmed.
Signed at Calgary, Alberta, this 28th day of January 2000.
"Michael H. Porter"
D.J.T.C.C.