Neutral Citation: 1999 ONFSCDRS 84

FSCO A97-001983

BETWEEN:

MARILYN E. NEILL

Applicant

and

ZURICH INSURANCE COMPANY

Insurer

REASONS FOR DECISION

Before: Nancy Makepeace

Heard: March 8, 9 and 10, 1999, at the Offices of the Financial Services Commission of Ontario in Toronto.

Appearances:

Robert G. Schipper and Ken Jepson for Ms. Neill

Pamela M. Stevens for Zurich Insurance Company

Issues:

The Applicant, Marilyn E. Neill, was injured in motor vehicle accidents on December 1, 1995 and August 17, 1996. She applied for and received statutory accident benefits from Zurich Insurance Company ("Zurich"), payable under the Schedule.¹ Zurich terminated weekly income replacement benefits relating to the first accident on November 28, 1996, and denied initial entitlement to benefits relating to the second accident. The parties were unable to resolve their disputes through mediation, and Ms. Neill applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended. The parties agreed that this proceeding would deal only with the calculation of the Applicant's income replacement benefits. The hearing may be resumed, if necessary, to deal with the Applicant's entitlement to certain medical benefits and to income replacement benefits after November 28, 1996.

The issues in this hearing are:

What is the correct amount of the Applicant's weekly income replacement benefits? In order to decide this issue, I must decide the following questions:

a. Was the Applicant employed or self-employed at the time of the accident?

b. Is the Insurer entitled to deduct the Applicant's employment expenses from her gross commission income in calculating her benefits?

c. Is the Applicant's real estate commission income earned on the date the agreement of purchase and sale became unconditional (the firm deal date) or on the date the transaction was completed (the closing date)?

Is Zurich entitled to repayment of benefits already paid?
Is Ms. Neill entitled to interest on any amounts owing?
Is Ms. Neill entitled to her expenses incurred in this arbitration proceeding?

Result:

The correct amount of the Applicant's benefits is $394.55 per week, less deductions pursuant to subsections 10(3), 10(4) and 10(5) of the Schedule. If the Applicant establishes entitlement to benefits after November 28, 1996, the total amount of benefits outstanding to March 8, 1999 is $8,755.84. Any ongoing benefits to which the Applicant is entitled are to be calculated on the same basis. In reaching this conclusion, I made the following findings:

a. The Applicant was an employee of Royal LePage before the accident.

b. The Insurer is not entitled to deduct the Applicant's employment expenses from her gross commission income.

c. The Applicant's commission income was earned on the firm deal date. Accordingly, it is to her advantage to base her benefits on her "gross weekly income" in the 52 weeks before the accident rather than her gross weekly income in the 4 weeks before the accident.

Zurich is not entitled to repayment of benefits already paid.
The Applicant is entitled to interest on benefits owing of 2 percent per month, compounded monthly.
The issue of expenses may now be spoken to.

EVIDENCE AND ANALYSIS:

Background

After the accident of December 1, 1995, the Applicant applied for accident benefits on the basis that she was an employee of Royal LePage Real Estates Services Ltd. ("Royal LePage") with a gross annual income of $38,833.20 for the 52 weeks before the accident.² Carolyn Curtis, the Applicant's manager, confirmed the Applicant's income and employment status. Based on this information, the Insurer began paying income replacement benefits ("IRBs") of $471.61 per week. The Insurer suspended benefits effective September 13, 1996 in order to recoup an alleged overpayment resulting from the Applicant's receipt of post-accident income. Benefits were terminated effective November 28, 1996 based on the report of a disability designated assessment centre ("disability DAC").

The Applicant testified that her second accident, which happened on August 17, 1996, was less serious than the first, and only exacerbated her pre-existing injuries. On October 17, 1996, the Insurer refused benefits relating to the second accident.

Employment status

The Applicant claims that she was an employee of Royal LePage before the accident. The Insurer submits that she was self-employed. A finding that the Applicant was self-employed would have two important consequences. First, while an employed person may elect to base her benefits on her income in the 4 weeks, 52 weeks or 156 weeks before the accident, a self-employed person is not entitled to elect the 4-week period.³ The Applicant wants to rely on the 4-week period because two of her sales closed in that period, earning her $7,014; extrapolated to 52 weeks, this results in a gross annual income of $91,182 and a base weekly benefit rate of $932.95. However, choosing to base her benefits on the 4 weeks before the accident is advantageous to the Applicant only if her commission earnings are recognized on the closing date — the date when the agreement of purchase and sale was completed, property changed hands and the commission became payable. If I find that the appropriate date for recognizing commission income is "the firm deal date" — the date the agreement of purchase and sale became unconditional, all conditions having been satisfied or waived — the Applicant would elect to base her benefits on her income in the 52 weeks before the accident, because none of her deals became firm in the 4 weeks before the accident.⁴

The Insurer submitted that the Applicant ought not to be permitted to elect the 4-week period because, in the Insurer's view, it would substantially overcompensate her. I agree with the Applicant that the Schedule contains no such qualification: if the Applicant was employed at the time of the accident, she is entitled to elect the 4-week period. Where the Schedule is clear and unambiguous, I have no authority to refuse to apply its plain words on policy grounds.

The second consequence of a finding that the Applicant was self-employed before the accident is that her benefits would be based on her income net of business expenses. Section 83 of the Schedule says that a self-employed person's "income from self-employment shall be determined in the same manner as the person's profit from the business . . . would be determined under the Income Tax Act (Canada) and the Income Tax Act (Ontario)."⁵ In contrast, an employee's net income is determined, pursuant to section 81, based on a formula that deducts only three amounts from gross income: Canada Pension Plan premiums, Employment Insurance premiums and income tax payable.

Accordingly, the key issue in this case is whether the Applicant was employed or self-employed before the accident.

Section 5 of the Schedule says that "a person is employed if, for salary, wages, other remuneration or profit, the person is engaged in employment, including self-employment, or is the holder of an office, and 'employment' has a corresponding meaning." "Self-employed" and" self-employment" are not defined. In determining whether the insured person was employed or self-employed, Arbitrators have looked beyond the form of the applicant's business arrangements "to examine the substance of each individual's financial situation within the overall pre-accident context."⁶ Many of the relevant factors are set out in the Commissioner's Guideline for Identifying Self-employed Individuals.⁷

In this case, the evidence overwhelmingly indicates employment rather than self-employment. The Applicant has worked exclusively with Royal LePage (and its predecessor, Royal Trust) throughout her 142 years as a real estate agent. Royal LePage is incorporated, and operates through branch offices; the Applicant's change of offices in 1993 did not affect her employment relationship with the company. Royal LePage issued the Applicant an annual T4 slip, and the Applicant consistently reported her income to Revenue Canada as employment income. Income tax, Canada Pension Plan premiums and Employment Insurance were withheld at source from the Applicant's commission payments. Though the Applicant earns her income strictly from commission, I do not find this factor determinative, because many sales people who are clearly employees work on a strict commission basis.

Royal LePage exercises a significant degree of control over the Applicant's work. A "position description" sets out in detail the responsibilities of a "residential sales representative," including: reporting to the branch manager, adhering to company policies, reporting all listings and activities in sales meetings, reporting all offers to the branch manager, being on duty in the branch office at assigned times for walk-in customers, advising the branch secretary of the agent's whereabouts during office hours, ensuring that the company obtains full commission on all sales, reporting any public complaints or disputes with other agents to the branch manager, achieving planned sales goals, and maintaining expenses within predetermined guidelines. In her oral evidence, the Applicant confirmed these responsibilities. She explained that if she must be away from the office, she must contract with another agent to cover for her, and the branch manager must be given a copy of the contract. She also testified about the company's sales awards. The Applicant's Royal LePage business card indicates that she has achieved the Sales Achievement Award, Master Sales Award and President's Gold Award. While the Applicant has some discretion in her methods and hours of work, I find that she has only the autonomy enjoyed by many white-collar and professional employees. I find this evidence consistent with employment status.

The most decisive evidence that the Applicant was an employee before the accident is a memo she received from the Vice-President and Regional Manager of Royal LePage, dated January 27, 1998, as follows:

Since 1994, over 90% of our sales force made the change to that of an Independent Contractor. It was hoped that in the ensuing three years all other agents would make the change voluntarily and many did so. Today, fewer than 200 of our sales agents across Canada are employee status. Due to our on-going commitment to control administrative costs we can no longer continue to provide services using dual systems, one which is computerized the other which is manual. We have now reached the point three years later where it has become necessary to ask you to make this change and wish to provide each of you with the time to do so.

This letter will therefore confirm and give written notice that effective January 1, 1999, your status as an agent/employee changes to that of an Independent Contractor as we will no longer be able to provide the administrative support.

The Independent Contractor agreements are available in the Branch and we ask that you review any questions with your Manager. Should you wish to enact the change prior to December 31, 1998 please advise your Manager.

The Applicant has not signed an independent contractor agreement.

Before this change on January 1, 1999, agents could choose amongst five work plans which set out different commission structures depending on a number of factors, including the agent's commission level. Two of the plans were restricted to independent contractors. The other three plans gave agents the option of working as an employee or an independent contractor, but an employee's gross commission would be reduced by 7 percent to cover "employee administration costs." On January 14, 1998, just two weeks before the letter about the change in status, the Applicant had chosen Plan 3, and had checked off the box marked "employee" on the line that required the agent to select "employee" or "independent contractor" status. The agreement was signed by the Branch Manager as well as the Applicant. The Insurer led no evidence to rebut the inference that the Applicant elected to work as an employee throughout her real estate career.

The usual indicia of self-employment are absent in this case. The Applicant has not registered a sole proprietorship or partnership; nor has she incorporated. She does not have a GST number, which she would be required to do as a self-employed person, since she earned a gross income of over $30,000. She does not have a home office, though she admits to making and receiving work-related phone calls at home. She has a desk for her exclusive use at the branch office, and relies on the administrative support provided by Royal LePage. She does not retain an accountant or bookkeeper. She has no authority to negotiate a non-standard commission with a vendor, but must get management approval to do this. She does not have power to hire or fire anyone.

The Insurer submitted that the Applicant should be treated as self-employed because she is permitted to deduct her employment expenses from her gross income for tax purposes; Royal LePage has provided her with the appropriate Revenue Canada form — "Declaration of Conditions of Employment" (T2200). The Insurer submitted that the Applicant's income should be calculated the same way for benefit purposes as it is for tax purposes. This argument has some appeal. It can be argued that the Schedule characterizes an insured person as employed or self-employed mainly for the purpose of determining how to calculate her income and benefit rate, and that it is therefore appropriate to determine the Applicant's employment status based on which method of calculation will more accurately reflect the Applicant's income loss. However, a finding that an insured person is self-employed may also affect the weight given to evidence about her essential tasks and whether they can be or were modified after the accident.⁸

In any event, I am not convinced that the Schedule allows this approach. The legislators could have mandated that an insured person's income from employment or self-employment must be calculated the same way for benefits purposes as it is for tax purposes. Instead, they explicitly set out different rules for employed⁹ and self-employed insureds.¹⁰ Alternatively, the legislature might have given Arbitrators discretion to calculate benefits in whichever way would most accurately reflect an insured person's income loss. Instead, they created a detailed mandatory scheme for benefit calculation involving sections 7 to 14 in Part II and sections 81 to 87 in Part XIX.

In my view, the Schedule contemplates a "threshold" characterization of an insured person's status as employed or self-employed, and certain consequences — including consequences for benefit calculation — follow from that characterization. I am not convinced that the Schedule allows me to conclude that the Applicant is self-employed, or should be treated as if she were self-employed, just because this might result in a more accurate reflection of her income loss.

I find that the Applicant was employed before the accident. Accordingly, she is entitled to elect to have her benefits based on her gross income in the 4 weeks, 52 weeks or 156 weeks before the accident.

Recognition of commission income

The Applicant claims benefits based on her income relating to two deals that closed in the 4 weeks before the accident. The Insurer submitted that real estate commission income should be recognized on the firm deal date.

The Schedule is silent on whether real estate commission should be recognized on the firm deal date or the closing date or on some other basis. Arbitrators have struggled to find a way to apply the income calculation provisions of the Schedule so that a real estate agent's benefits accurately reflect her income earned before the accident. Several difficulties have been recognized: (i) the agent is paid only if the deal closes, regardless of the work done on the deal; (ii) weeks or months may elapse between the time an agent first begins working on the deal and the time she receives the commission; (iii) in addition to their work on specific listings, agents also do prospecting and other work not specifically related to any particular transaction; and (iv) real estate agents often have incomes that fluctuate significantly depending on the season and the state of the real estate market. Moreover, the firm deal date may seem to be fairer or more accurate in one case, and the closing date in another, depending on when the accident happened in the real estate cycle.

Several arbitration and appeal decisions have considered this issue. The leading case is Gaudreault and Pilot Insurance Company, in which Director's Delegate Draper made the following comments:¹¹

The question is, when are real estate commissions earned? I agree with previous arbitration decisions that have held that the Schedule does not mandate a single accounting approach for all cases.¹² I am not persuaded that either the "closing date approach" or the "agreement date approach" can be adopted for all cases. The point at which real estate commissions are earned may depend on the particulars of the agreements involved. The agent's general accounting practice for recording income, or the practice of colleagues, might affect the approach. I would expect that a commission is earned by the closing date, but it may be possible to establish that it was earned earlier. In my view, the point at which there is an unconditional agreement of purchase and sale is the most likely time.

In an earlier decision, Ferrari and Royal Insurance Company of Canada,¹³ I considered whether the applicant's real estate commission received after the accident should be considered part of his pre-accident income. I came to the following conclusion:

Weekly income benefits are intended to compensate an insured person who is substantially unable to do his or her pre-accident job because of injuries sustained in an accident. In situations where the work is performed before the accident but the money is paid afterwards, it is consistent with the legislative purpose underlying section 12 to recognized income when it is earned. In this case, I accept the Applicant's evidence that he had completed all or substantially all of his work on the lease by May 6, 1993 when the Offer was accepted. Accordingly, the commission will be recognized in the Applicant's pre-accident income.

Director's Delegate Draper agreed with this analysis in Gaudreault. That case was decided under the 1990 Schedule,¹⁴ but the same considerations apply with respect to the 1994 Schedule. The Applicant's arguments in favour of the closing date approach in this case added nothing to the submissions considered in previous decisions.

In J. W. and Canadian General Insurance Group,¹⁵ I found that the firm deal date approach more accurately reflected the applicant's earnings pattern in the three years before the accident. As stated earlier, in this case, the closing date approach results in a substantial windfall for the Applicant if she elects to base her gross annual income on her income in the 4 weeks before the accident. However, the Schedule clearly allows her to make that election if, as I have found, she was employed before the accident. Accordingly, the earnings history analysis does not help me to determine whether the firm deal date approach or the closing date approach more accurately reflects the Applicant's pre-accident income.

The Insurer requested a firm ruling that would provide insured persons and insurers with certainty on this issue. In my view, clarification must ultimately come from the legislature. However, I am mindful that the underlying purpose of income replacement benefits is to replace "income from employment" that is lost as a result of an impairment sustained in an accident. I am inclined to think that the firm deal date approach is more likely, in more cases, to fairly and accurately reflect an insured person's lost income.¹⁶ In this case, I have heard nothing to cause me to depart from this approach, which I find affords the Applicant a benefit which fairly, reasonably, and accurately reflects her pre-accident income.

Accordingly, I find that the Applicant earned gross income of $30,875.25 in the 52 weeks before the accident.

Employment expenses

The Insurer submits that the Applicant's employment expenses should be deducted from her gross commissions in calculating her income for benefits purposes. As the Applicant has incurred substantial employment expenses each year, deducting them from her commissions would significantly reduce her benefit rate, whether her income is based on the 4 weeks or 52 weeks before the accident, and whether it is based on the firm deal date or the closing date approach.

Subsection 9(1) of the Schedule says that for the purpose of determining the amount of a person's income replacement benefits, the person's "gross annual income from employment" shall be based on his or her "gross income from employment" for the 4 weeks, 52 weeks or 156 weeks before the accident. "Gross annual income from employment" and "gross income from employment" are not defined.

Section 10 of the Schedule gives the rules for calculating the amount of benefit. The basic rule is that a person's income replacement benefit is 90 percent of her net weekly income from employment. Pursuant to subsection 10(1), "net weekly income from employment" is determined in accordance with section 81, which sets out a formula, or section 82, which provides that an insurer may elect to use FSCO net weekly income tables to determine net income based on gross income. The Insurer in this case did not elect to use the tables. The section 81 formula is as follows:

81.—(1) For the purpose of this Regulation, a person's net weekly income from employment shall be determined in accordance with the following formula:

A = (B - C - D - E) / 52

where,

A = the person's net weekly income from employment,

B = the person's gross annual income from employment,

C = the annual premium payable by the person under the Unemployment Insurance Act (Canada) on the gross annual income from employment,

D = the annual contribution payable by the person under the Canada Pension Plan (Canada) on the gross annual income from employment,

E = the income tax payable by the person under the Income Tax Act (Canada) and the Income Tax Act (Ontario) on the gross annual income from employment.

Section 81 makes no reference to employment expenses. The Insurer submitted that as section 81 is silent on the point, tax-deductible employment expenses should be deducted from an employee's commission income in calculating net weekly income from employment.¹⁷According to the Insurer, the Applicant's benefit rate would more accurately reflect her real net income (her "take home pay") if her employment expenses were deducted from her commissions. Moreover, the Applicant has had the advantage of deducting her employment expenses from her total income for tax purposes. Applying a consistent approach for benefit and tax purposes arguably avoids the evidentiary problems that may result when an insured person takes a different approach to income calculation for benefit purposes and tax purposes.¹⁸ It also provides greater certainty and administrative convenience.¹⁹

I cannot accept the Insurer's submission, for the following reasons:

For the reasons given above, I do not accept that the Schedule permits me to determine that the Applicant was self-employed — or should be treated as if she were self-employed — solely on the basis of the consequences for income calculation.
The Concise Oxford Dictionary (Eighth Edition) defines "gross" as "total; without deductions; not net (gross tonnage, gross income)." I find that the ordinary meaning of "gross income" is "total income" or "income before any deductions." The Insurer was unable to offer any reason for giving "gross" a different meaning. In the absence of a stipulated definition, I find that "gross income" and "gross annual income" must be given their ordinary, common sense meanings.
Most employees cannot deduct employment expenses from their income for tax purposes. In those cases, section 81 clearly contemplates that "gross income" is total income before deductions. Nothing in section 81 indicates that "gross income" means something different when applied to employees who are entitled to deduct employment expenses for tax purposes.
Section 81 defines "net income from employment" by specifying the deductions that are to be made from gross income. That the method of calculation is set out in a formula reinforces the sense that the definition is precise, exhaustive and mandatory.
Consistent with this reading of section 81 is section 85(1), which states that for the purposes of the Schedule, income tax payable "shall be determined" having regard only to listed deductions and credits. Employment expenses are not on the list. Significant discrepancies would result if employment expenses were deducted from "gross annual income from employment" ("B" in the section 81 formula), but "income tax payable" ("E" in the formula) were calculated without reference to deductible employment expenses.
Section 81 must be read in context with section 83, which says:

For the purpose of this Regulation, a person's income from self-employment shall be determined in the same manner as the person's profit from the business in which the person was self-employed would be determined under the Income Tax Act (Canada) and the Income Tax Act (Ontario), but without taking into account,

(a) expenses that are eligible for capital cost allowance or an allowance on eligible capital property;

(b) capital gains or losses; or

(c) losses deductible under section 111 of the Income Tax Act (Canada).

Section 83 indicates that the legislature thought about business expenses: if the Applicant were a self-employed real estate agent, her income would clearly be determined by deducting her business expenses from her commission. By the principle of implied exclusion, I find that section 81 does not permit the same method of calculation to be used with respect to employment income.

Section 10 draws the same distinction with respect to calculation of post-accident income. Subsection 10(5) says that where the FSCO tables are not being used, net employment income "shall be determined" by deducting Employment Insurance premiums, Canada Pension Plan premiums and income tax payable from gross income.

Subsection 10(6) provides that certain types of expenses are not to be deducted in calculating net income from self-employment. Subsections 10(7) and 10(8) provide for "losses from self-employment" to be added to the base benefit. These provisions make sense only on the assumption that the Schedule draws a "bright line" between employment income and self-employment income for the purpose of benefit calculation.

Though it may seem obvious that the Applicant will be overcompensated if her employment expenses are not deducted from her commissions, this may not be so clear on closer examination. Only certain employees are permitted to deduct employment expenses from gross income for tax purposes. The employee must be required to incur the expenses under her contract of employment; she must be paid wholly or partly by commission; she must not be compensated for the expenses through a non-taxable allowance; and she must be required to work away from her employer's place of business. I expect that commission employees are given this tax break in recognition of their uncertain incomes and their substantial expenses for which they are not otherwise compensated. I note, as well, that employees cannot deduct the broad range of expenses self-employed people are permitted to deduct. In addition, any windfall in terms of IRBs must be weighed against the fact that the Applicant's employer charged her an additional 7 percent of commissions because she chose to retain employee status. Accordingly, I am not persuaded that the Applicant's approach results in absurd results. If any windfall does result, this is a matter for the legislature.

For all these reasons, I do not accept that the Schedule permits the deduction of employment expenses from the Applicant's "gross annual income from employment."

Benefits payable

Accordingly, the Applicant's gross annual income, based on the 52 weeks before the accident, recognizing income on the firm deal date, and without deducting employment expenses, is $30,875.25.²⁰ Her benefit is $394.55 per week before deductions. Post-accident income is to be recognized on the same basis. If the Applicant establishes entitlement after November 28, 1996, total benefits payable to March 8, 1999 (the first day of the hearing) were $32,135.84, and the Insurer has paid $23,380. Accordingly, the Applicant is entitled to a further $8,755.84 to March 8, 1999, plus ongoing benefits calculated on the same basis. Interest is payable at 2 percent per month, compounded monthly, under section 68 of the Schedule.

SPECIAL AWARD:

The Applicant submitted that the Insurer breached its obligation to explain the benefits available when its adjuster advised the Applicant — incorrectly — that she could not elect the 4-week earnings basis period because she received commission income. Pursuant to paragraph 59(2)(c), the Insurer was required to give the Applicant written information to assist her in applying for benefits, including information to assist her in electing to base her income on the 4 weeks, 52 weeks or 156 weeks before the accident.²¹ The Insurer led no evidence that it provided the Applicant with any written information on the calculation of benefits. I find that the Insurer contravened the requirements of paragraph 59(2)(c).²²

However, I am not satisfied that the Insurer "unreasonably withheld or delayed payments" so as to warrant a special award. The Applicant's claim raised a novel issue about the method of calculating the benefits of an employed real estate agent who is entitled to deduct her employment expenses for income tax purposes. As well, there remains uncertainty in the law as to whether real estate commission is recognized on the firm deal date or the closing date. My finding that the Applicant's commissions were earned on the firm deal date means that the 52-week calculation is the most favourable to the Applicant. Accordingly, she was not ultimately prejudiced by her election of the 52-week calculation. I am not satisfied that the Insurer's refusal to pay benefits at the rate claimed by the Applicant was an unreasonable withholding of benefits.

EXPENSES:

The question of expenses was deferred until all other issues in dispute were decided. Therefore, the issue of Ms. Neill's expenses of this arbitration proceeding may now be addressed.

May 10, 1999

Nancy Makepeace Arbitrator

ARBITRATION ORDER

Under section 282 of the Insurance Act, R.S.O. 1990, c.I.8, as amended, it is ordered that:

The Applicant's income replacement benefit is $394.55 per week, before deductions relating to post-accident income. If the Applicant establishes entitlement to income replacement benefits after November 28, 1996, the total amount of benefits outstanding as of March 8, 1999 is $8,755.84. Any ongoing benefits shall be calculated on the same basis as set out in my reasons. Interest on overdue benefits is payable at 2 percent per month, compounded monthly.
The Insurer's claim for repayment of overpaid benefits is dismissed.
The issue of expenses may now be spoken to.
The hearing may be resumed, if necessary, to determine the remaining issues.