Financial Services Commission

Commission des services financiers de l’Ontario

Neutral Citation: 2000 ONFSCDRS 131

Appeal P00-00007

Appellant

and

Respondent

Before:

David Draper, Director's Delegate

Counsel:

George S. Gage (for Allstate)

Michael W. Kelly (for Mohammad Malik)

APPEAL ORDER

Under section 283 of the Insurance Act, R.S.O. 1990, c.I.8, as amended, it is ordered that:

The appeal is allowed and the arbitration order dated December 16, 1999 is rescinded and replaced with the following order:

Mohammad Malik was self-employed at the time of the accident and, therefore, cannot designate the four weeks before the accident as the period over which his gross annual income from employment is calculated.

Mohammad Malik is entitled to his reasonable appeal expenses, payable by Allstate Insurance Company of Canada.

July 17, 2000

David R. Draper Director's Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL

Allstate Insurance Company of Canada ("Allstate") appeals from an arbitration order dated December 16, 1999. It claims the arbitrator erred in concluding that Mr. Malik was employed, not self-employed, as a taxi driver at the time of his automobile accident.

II. BACKGROUND

Mr. Malik worked as a taxi driver for a number of years. However, starting in the spring of 1996, he was unemployed for roughly a year. Less than four weeks before his accident on March 30, 1997, he began driving for Veterans Cab Company ("Veterans") as a "full-time lease driver under the Veterans Taxi banner." As such, he paid Veterans a flat "lease payment" of $50 per day for the use of a vehicle that Veterans owned, serviced and insured. He was also responsible for gas and keeping the car clean. Veterans did not pay him any income, but he was entitled to keep all his fares and tips. He was required to have a G.S.T. number and pay that tax directly.

The amount of Mr. Malik's weekly income replacement benefits ("IRBs") depends on whether he was employed or self-employed. According to s.8 of the SABS-1996,¹ if he was employed, he can elect to have his benefits calculated based on the four weeks before the accident. If he was self-employed, he does not have this option. His benefits would have to be based on his income over the full 52 weeks before the accident, resulting in a much lower rate.²

Although there are other disputes in this case, the parties agreed to a preliminary hearing on the employment/self-employment issue. Allstate appeals from the arbitrator's conclusion that Mr. Malik was employed by Veterans and, therefore, can rely on the four-week period.

Because the appeal is from a preliminary order, Allstate required leave. In a letter dated February 8, 2000, Director's Delegate Naylor exercised her discretion under Rule 46.2 of the Dispute Resolution Practice Code to allow the appeal to proceed. Subsequently, the Director transferred the matter to me.

"Employed" is defined in s.2(5) of the SABS-1996 as follows:

For the purpose of this Regulation, 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.

This definition establishes "employed" as the general term, with "self-employment" as a specific type of employment. It provides little assistance, however, in distinguishing the two, and "self-employed" is not separately defined. To fill this gap, the Commissioner issued a Guideline for Identifying Self-employed Individuals.³ It sets out indicators of self-employment in two situations — "traditional self-employment" and "contract of service." The arbitrator considered the Guideline, but found that while Mr. Malik's situation had some indicators of self-employment, it was not fully captured by the description of either traditional self-employment or contract of service.

The arbitrator then looked to common law interpretations of employment. Based on decisions from the Privy Counsel and the Supreme Court of Canada,⁴ he considered the manner and degree to which Mr. Malik was integrated into Veterans organization, as well as the traditional indicia of self-employment: ownership of tools; chance of profit or loss; and issues of control. In doing so, he identified the following factors, which I have divided into those suggesting self-employment and those suggesting employment:

Factors suggesting self-employment

Veterans treated Mr. Malik as self-employed for all purposes.
Veterans did not make any payments to Mr. Malik. His income came solely from fares and tips.
Veterans did not make any deductions for income tax, Canada Pension Plan, or employment insurance, and did not issue a T4 form.
Mr. Malik had a GST number and was required to file GST returns on his taxi earnings.
Mr. Malik was not covered for workplace accidents by workplace safety legislation or any other plan maintained by Veterans.
Mr. Malik worked hours in excess of those mandated in employment standards legislation without specified breaks or payment for overtime.
In his application for accident benefits, Mr. Malik described himself as self-employed. According to the arbitrator, however, he testified that someone from Allstate told him that was the appropriate designation.
Mr. Malik filed his 1996 tax return as a self-employed taxi driver, claiming expenses and deductions appropriate for someone who is self-employed.⁵

Factors suggesting employment

Mr. Malik was chosen by Veterans and could not delegate his work to another driver unless that person was also approved by Veterans Cab.
Mr. Malik did not own his own taxi. Veterans assigned him a vehicle that it owned, insured and serviced. If his vehicle was not available, Veterans provided a backup.
Veterans provided a dispatch system.
Veterans controlled Mr. Malik's hours. He was generally assigned the night shift and was expected to drive through the whole shift.
Veterans considered Mr. Malik a "full-time" driver. The long hours he worked meant that, in practice, he provided his services exclusively to Veterans.
Veterans had company policies on matters such as dealing with customers and where they should be picked up and dropped off. Failure to comply with company policies or complaints from the public could result in the removal of a driver.
Mr. Malik was required to file his "run sheets" with Veterans at the end of each shift.

Before the accident, there was little suggestion that Mr. Malik was an employee. Veterans treated him as self-employed and, as the arbitrator found, Mr. Malik acquiesced in this characterization, at least until he realized its consequences for his accident benefits. However, relying on decisions made in the context of labour relations,⁶ the arbitrator held that the intention of the parties is not determinative. At page 8, he states: "To allow such an intention to be the last word, would be to allow employers to contract out of statutory obligations to employees simply by calling the work 'self-employment,' without any need to meet any objective criteria for such a description." While acknowledging that Mr. Malik met a number of the criteria of self-employment, the arbitrator found that Veterans' characterization of its drivers as self-employed had "the appearance of a convenient subterfuge that had the effect of reducing its obligations to its workers and should not be taken as determinative."

The arbitrator then considered the purpose of the legislation, adopting the "statutory purpose" approach taken by Arbitrator Novick in Chahal and Zurich Insurance Company, (FSCO A96-001785, August 27, 1998). In that case, the insured person worked out of her home sewing for a single company. When the company needed sewing done, it contacted Mrs. Chahal and provided her with material that she sewed on a machine she rented from a rental company. She was paid in cash on a piecework basis, with no deductions. The issue, as here, was whether Mrs. Chahal could elect to have her IRBs based on her income in the four weeks before her accident.

Arbitrator Novick held that Mrs. Chahal was employed and, therefore, entitled to choose the four-week period. Her reasons follow:

A review of the relevant provisions of the Schedule reveals that the only distinction is the different manner in which employment income and income derived from self-employment is treated. One of the differences is that the Schedule permits individuals who earn employment income to designate the last four weeks prior to the accident as the relevant period from which their entitlement to income benefits are calculated, while those who are self-employed may only designate the prior year or three years prior. The rationale behind this distinction is due to the manner in which income from self-employment is usually calculated, that is the individual's business expenses are deducted from his or her earnings, and the nature of some of those expenses makes it impractical to consider a period as short as four weeks.

Given the rationale for treating these two types of income differently, the fact that Mrs. Chahal reported the income she earned from Chavetta as "other income," as opposed to business income, on her tax return and did not deduct any business expenses from her income becomes important. The evidence was clear that she did not conduct a business, in any real sense, and in my view, any factors that might generally suggest self-employment, such as her paying for the rental of the sewing machine and supplying the needles and scissors she used, as well as Chavetta's failure to deduct the usual statutory remittances or taxes, were likely the result in this case of the unequal bargaining power that was a feature of her relationship with Chavetta.

(p.16 - emphasis added)

Mr. Malik's situation was different. Unlike Mrs. Chahal, his income came from his fares, not Veterans, and he reported it as business income, deducting business expenses. Nevertheless, the arbitrator concluded that he should be treated as employed for purposes of the SABS-1996, noting that "[t]here are no claims for capital cost allowance or other yearly expenses listed, that would make it impractical to consider a period as short as four weeks."⁷ In the arbitrator's view, Mr. Malik was like an employed commission sales agent, "whose income is dependent on sales and who is permitted to deduct the expense of sales from his income." He concluded:

He worked exclusively as an integral part of the Veterans organization, and responded to their directions and schedule. He was not free to subcontract his work, and he owned neither the vehicle, the taxi licence nor access to the dispatch system. These were all under the control of the Veterans organization.

Although Mr. Malik may meet some of the criteria of the traditional concept of "self-employed" and some of the "contract of service" situation, I find that on balance, Mr. Malik's situation most closely resembles that of an "employee."

This conclusion is consistent with the manner in which he worked, as well as with the ordinary meaning of the word "employed." He was clearly employed "in the service" of Veterans Cab and was not "working for himself." (p.11)

As a result, the arbitrator held that Mr. Malik was employed and, therefore, could elect to have his IRBs calculated based on the four weeks before the accident. Allstate appeals, claiming that he erred in law in reaching this conclusion.

III. ANALYSIS

These are hard facts. It seems unfair to calculate Mr. Malik's IRBs on the 52 weeks before the accident when he had just returned to work, with no indication that he would not continue indefinitely. However, this outcome arises directly from changes made in the SABS-1996. Under either of the previous legislative schemes, it would not have mattered whether Mr. Malik was employed or self-employed, at least for the purposes of the calculation period.

Under the Schedule,⁸ the 1990 version of the legislation, insured persons were allowed to choose either the four or 52 weeks before the accident whether they were employed or self-employed. Therefore, someone in Mr. Malik's position could have chosen the four-week period even if they were characterized as self-employed.

The situation changed with the SABS-1994.⁹ While insured persons generally could elect to have their IRBs based on the four, 52 or 156 weeks before the accident, the four-week option was not available for those who were self-employed at any time during the four weeks before the accident. As the arbitrator states, this limitation was based on a concern that income from self-employment was likely to be distorted if measured over a period as short as four weeks. The impact was softened, however, by the extrapolation provisions in s.9(3) and (7) of the SABS-1994. If Mr. Malik was governed by this legislation, his earnings in the weeks before the accident could have been extrapolated over the full 52-week period.

In the SABS-1996, the extrapolation provisions were removed and the calculation period options were changed again. Most insured persons were allowed to choose between the four or 52 weeks before the accident; 156 weeks was no longer an option. Self-employed persons were limited to the 52 weeks before the accident, or their last full fiscal year completed before the accident. In my view, the drafters must be seen as contemplating the consequences of these changes — insured persons who were self-employed at the time of the accident cannot rely on the four week period even if it would provide a better estimate of their lost income.

In my opinion, the arbitrator worked too hard to avoid the consequences of the new legislation. In effect, he treated Mr. Malik as employed for the purposes of the calculation period, but self-employed for the calculation of his gross annual income from employment. Although this is a doubtful interpretation, it would be tempting if it could be confined to the facts of this case. The real problem is that if Mr. Malik is employed, so are many other taxi drivers whether they want to be or not. This, in my view, would unreasonably distort the operation of the SABS-1996.

While I accept that the interpretation of employment status should be done in context, with the purpose of the legislation in mind, I believe the arbitrator lost perspective by concentrating too intently on the calculation period. The four-week rule is a consequence of self-employed status, not a determinant. As Arbitrator Makepeace held in Neill and Zurich Insurance Company, (FSCO A97-001983, May 10, 1999), the threshold question is whether the insured person is employed or self-employed, with certain consequences flowing from this determination. Put bluntly, Mr. Malik cannot be treated as an employee simply because the four-week period provides a better measure of his income.

Employment status is used in the SABS-1996 to measure the insured person's pre-accident income. Therefore, the primary focus is on income, not other aspects of the employment relationship. Looking back at the definition of "employed" in s.2(5), Mr. Malik is employed "if, for salary, wages or other remuneration or profit," he is "engaged in employment, including self-employment." It is clear that he did not receive a salary, wages or other remuneration from Veterans. Instead, he relied on earning a profit — fares and tips exceeding his expenses for rent, gas and car washes. Section 62 of the SABS-1996 links profit and self-employed status. It provides that income from self-employment is determined in the same manner as profit under the Income Tax Act.

This focus on income is also reflected in the Commissioner's Guideline which includes the following definitions not mentioned by the arbitrator:

Business

An activity that is carried on for profit or with a reasonable expectation of profit, including a profession, a calling, a trade, a manufacture or undertaking of any kind, an adventure or concern in the nature of trade, or a service.

Employee

An individual who is hired to perform pre-determined tasks/work in a business in exchange for remuneration.

Employer

An entity, such as a corporation, group of individuals or a single individual, who hires another individual(s) to perform pre-determined tasks/work in a business in exchange for remuneration.

It seems to me that Mr. Malik's situation fits most easily under the definition of "business." He drove a taxi with a reasonable expectation of profit. Although Veterans hired him to do pre-determined work, it did not provide any remuneration. Instead, it provided was an opportunity for him to earn a profit. While Veterans controlled some aspects of the relationship, its only financial connection was in collecting the rent.

The real question is whether Mr. Malik's relationship with Veterans should be redefined because it distorts his pre-accident income. In my view, it does not. As discussed in more detail below, the calculation provisions in the SABS-1996 apply easily and fairly if Mr. Malik is self-employed, but less comfortably if he is employed. In fact, it is difficult to imagine that his employment status would have been an issue if he had been working throughout the 52 weeks before the accident. The distortion, if it is properly seen as a distortion, does not come from treating Mr. Malik's income as income from self-employment. It comes from the decision made in the SABS-1996 to eliminate the four-week option for self-employed persons.

I also accept Allstate's submission that the arbitrator relied too heavily on decisions made in other contexts. Employment status has a limited role in the SABS-1996. It determines the method used to calculate the insured person's gross annual income, the figure used to determine the amount of his or her IRBs. In contrast, workers' compensation and employment standards legislation is meant to regulate the workplace, ensuring that employers live up to certain obligations. In that context, it makes sense for officials and adjudicators to aggressively scrutinize employment relationships, however they are characterized. It is far less clear that employment relationships should be redefined for the purposes of accident benefits unless they distort the insured person's pre-accident income.

A. Calculations under the SABS-1996

According to s.6(1)(a) of the SABS-1996, IRBs are based on 80 per cent of the insured person's net weekly income from employment. Because employment includes self-employment, this formula applies whether Mr. Malik was employed or self-employed. Section 61 sets out the calculation of net weekly income.¹⁰

(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

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 Employment 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.

Gross weekly income, "B" in the formula, is not a defined term. However, for self-employed persons, s.62 provides specific rules for determining income from self-employment. It is determined in the same manner as the person's profit for income tax purposes, with some exceptions related to capital.

At the arbitration hearing, Allstate questioned how Mr. Malik's income would be calculated under this section given the lack of any reference to expenses. Clearly, his income would be inflated if expenses were not taken into account. As set out above, the arbitrator dealt with this by stating, without authority, that Mr. Malik could deduct his expenses under s.61(1) just like an employed salesperson paid by commission.

I am aware of two arbitration decisions dealing with this issue, neither supporting the arbitrator's position. In Dhir and Non-Marine Underwriters, Member of Lloyd's, (OIC A97-000760, May 11, 1998), currently under appeal, the insured person worked as a real estate agent for two companies. He received T4 slips from both, suggesting that he was an employee. Both companies signed a Revenue Canada declaration that he had to incur certain expenses as a condition of his employment, allowing him to deduct them for tax purposes. Mr. Dhir argued that as an employee, he was entitled to have his net weekly income calculated under s.61 with no deduction for expenses. Arbitrator Renahan arbitrator rejected Mr. Dhir's argument, but not by finding the expenses deductable under s.61. Instead, he concluded that Mr. Dhir should be treated as self-employed because that would more accurately reflect his income.

The decision in Neill, cited above, also involved a real estate agent paid by commission. After finding that Ms. Neill was an employee, Arbitrator Makepeace rejected the insurer's argument that she should be treated as self-employed because the calculation under s.62 would better reflect her income. The next question was whether Ms. Neill's employment-related expenses, which she was allowed to deduct for income tax purposes, were deductable under s.81. Arbitrator Makepeace concluded they were not. Although the arbitrator relied on this decision for a different, more general purpose, he did not refer to this part of the analysis. Without commenting on the correctness of these decisions, they show that treating Mr. Malik as an employed person under the SABS-1996 is not as straightforward as the arbitrator suggests. Even more importantly, Mr. Malik was not paid by commission. Unlike a company that employs commission sales agents, Veterans had no interest in Mr. Malik's fares or tips. That was his income. To earn it, he had to incur expenses for rent, gas and car washes. Therefore, the amount he took home was the difference between his income and expenses, subject to income tax and EI and CPP premiums (if any). This is how he reported his income to Revenue Canada and how it would be calculated under s.62 of the SABS-1996. Because this approach fairly represents Mr. Malik's income, the only reason to redefine it is to avoid the four-week rule.

The arbitrator minimized the importance of Mr. Malik's income tax filings by saying there was no evidence that the authorities made a ruling on his status. I do not find this compelling. There also was no evidence that his income tax return was challenged and, as stated above, the only accounting evidence was that he should be treated as self-employed.

B. "Employment" in other contexts

The parties provided a number of decisions dealing with employment status in other contexts, some from Ontario and some from other jurisdictions. Looking at these decisions, I find it arguable, although not a certainty, that Mr. Malik would be considered an employee for the purposes of workers' compensation and employment standards. However, the interpretation of "employee" and "worker" in these decisions depends to a significant extent on the purpose of the legislation and, in some cases, specific definitions.

The Ontario workers' compensation decisions show an evolving approach to the issue, but fall short of establishing that a driver who pays a flat-rate lease and receives no income from the company will be viewed as an independent contractor, not a worker.¹¹ The most recent decision provided to me, Decision No. 959/95, is clearly distinguishable on the facts. In reaching its decision, the Workers' Compensation Appeals Tribunal ("WCAT") relied on a number of indicators of employment status, including the fact that fares were split 50/50 and the company provided the driver with an income tax return listing itself as the employer.

The analysis in Decision No. 959/95 shows the focus on the purpose of workers' compensation legislation. The panel describes WCAT's use of a "business reality" test, which blends the common law "fourfold" or "four corners" test and the "organizational" test. In applying the business reality test, WCAT considers factors meant to provide a sense of the overall character or substance of the relationship, and lead to a decision in accordance with "the real merits and justice" of the case — a phrase used in the legislation. In my view, the underlying question being asked is whether this is the kind of relationship that should be covered by workers' compensation. The focus on workplace injuries, and the role of employers in preventing and responding to injuries, is different and much broader than under the SABS-1996, where accident benefits are payable whether the insured person is employed or self-employed.

The importance of the legislative context is seen even more clearly in the employment standards decisions. In Re Belgoma Transportation Ltd. (c.o.b. Checker Cab), [1990] O.E.S.A.D. No. 198, an Ontario case, the issue was whether three taxi drivers were entitled to vacation pay as employees of Belgoma. The facts are complicated, but show a clear history of the company trying to avoid employer status. At issue was the scope of "employee" and "employer," both defined terms in the Employment Standards Act, R.S.O. 1980, c.137, as amended.

Referee Owen V. Gray considered the common law cases, but had this to say:

It has to be remembered, of course, that these distinctions [between "master" and "servant," "employee" and "independent contractor" and "contracts "of service" and "for services"] were originally developed for other purposes: usually to assess whether one person should be held vicariously liable to third parties for the actions of another. It is not hard to comprehend why the degree of direct control by the one over the actions of the other would be an important consideration for that purpose. Its purpose is less clear when the question is whether a particular contractual relationship ought to be regulated by the Employment Standards Act. The well established "master/servant" and "of services/for service" distinctions and language would have been known to the legislative draftsperson, who obviously rejected them in favour of less well-established terms used in open-ended definitions for a different, remedial purpose. (p.12)

Referee Gray went on to conclude that while common law factors are relevant, their relative importance depends on the purpose of the legislation. He held that because the Employment Standards Act is meant to ensure minimum standards of employment for those who perform work or supply services to an employer, the focus should be on the extent to which the person is integrated into the operations of the company and the degree of economic dependence resulting from that relationship.

I agree with this analysis, emphasizing the purpose of the legislation. Applying it to the SABS-1996, the interpretation of employment status should be aimed at ensuring that the insured person's income is measured fairly. While the starting point is the arrangement adopted by the parties, I agree that their characterization can be reevaluated if it provides a distorted picture of the person's income. However, that is not the case here. Mr. Malik's income is fairly represented by deducting his expenses from his income, as he reported to Revenue Canada. While his earnings may not have fluctuated as much as some other self-employed individuals, his revenues and expenses varied from week to week — the underlying reason for not giving self-employed persons the four-week option.

A similar issue arose in G. Hanlon Holdings Inc. (c.o.b. Checker Limousine), [1998] O.E.S.A.D. No. 300. In that case, the driver did not pay a fixed rent, but remitted 50% of his net fares (after deducting GST and gas expenses). This arrangement changed, with the driver paying $350 a week ($50 a shift), but keeping any revenue above that amount. Unlike Veterans, the company treated the driver as an employee for all purposes in relation to Revenue Canada.

The question before Referee Christopher J. Albertyn was whether the Employment Standards Officer erred in concluding that the driver was an employee under the Employment Standards Act and, therefore, entitled to termination pay. In upholding the decision, the Referee referred to the common law tests of employment, but also noted that the regulations specifically exempted taxi drivers from certain provisions of the Act, suggesting that they were meant to be included for other purposes. The same cannot be said of the SABS-1996.

Finally, the parties referred me to employment standards decisions from British Columbia. In my view, these decisions are of little assistance because they depend so heavily on legislation quite different from the SABS-1996. Not only does the B.C. legislation set out broad purposes, it includes definitions of "employee" and "employer."

In Re Victoria Taxi (1987) Ltd., [1998] B.C.E.S.T.D. No. 41, the British Columbia Employment Standards Tribunal agreed with previous decisions that the common law tests of employment give way to statutory definitions. The tribunal went on to distinguish its definition from the Alberta definition considered by the Supreme Court of Canada in Yellow Cab Ltd. v. Board of Industrial Relations et al., 1980 CanLII 228 (SCC), [1980] 2 S.C.R.. 761. In that case, the Court held that according to the definition of "employee," an employee-employer relationship could only exist where the employee was "in receipt of or entitled to wages" from the employer. Like Mr. Malik, the drivers paid rent for the use of a cab, but kept all of their fares and tips, receiving no payments from the company. The Court held that in those circumstances, the drivers received no wages and, therefore, were not employees. In some respects, the focus in the SABS-1996 on income makes the Yellow Cab analysis more relevant although given the differences in the legislation, I would not suggest it is determinative.

C. Conclusion

Employment relationships are varied and complex. Undoubtedly, some businesses structure their affairs to avoid the responsibilities of being an employer. The taxi industry seems to have been particularly aggressive in this respect. The question is whether insurers should be looking behind the arrangements of the parties. For reasons set out above, it is my view that they should be slow to do so, as should arbitrators reviewing their decisions. The parties' characterization should be disregarded only if it unreasonably distorts the insured person's pre-accident income.

That is not the situation here. There is nothing unfair about determining Mr. Malik's gross annual income from employment under s.62 of the SABS-1996 in the same way he calculated his profit for tax purposes — by deducting his business expenses from his fares and tips. The problem is the four-week rule. I am not persuaded, however, that employment status should be redefined to avoid the consequences of this provision. Consequently, the appeal is allowed.

III. APPEAL EXPENSES

At the appeal hearing, Allstate conceded that Mr. Malik should receive his appeal expenses regardless of the outcome. I find that appropriate and, therefore, Allstate will be ordered to pay Mr. Malik's reasonable appeal expenses.