Neutral Citation: 2009 ONFSCDRS 139

FSCO A08-000533

BETWEEN:

SALVATORE (SAM) PASSARELLO Applicant

and

WAWANESA MUTUAL INSURANCE COMPANY Insurer

DECISION ON A PRELIMINARY ISSUE

Before: Alec Fadel

Heard: July 27, 2009, at the offices of the Financial Services Commission of Ontario in Toronto

Appearances: Michael S. Brown for Mr. Passarello Ian D. Kirby for Wawanesa Mutual Insurance Company

Issues:

The Applicant, Salvatore (Sam) Passarello, was injured in a motor vehicle accident on May 12, 2000. He applied for and received statutory accident benefits from Wawanesa Mutual Insurance Company ("Wawanesa"), payable under the Schedule.¹ The parties were unable to resolve their disputes through mediation, and Mr. Passarello applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended. The insurer raised a preliminary issue concerning the employment status of the applicant at the time of the accident and a preliminary issue hearing was arranged to determine whether the applicant was self-employed or an employee at the time of the accident. The insurer argued that the applicant was self-employed at the time of the accident and that its accountant's attempt to determine the issue in 2001 was unsuccessful since the applicant did not provide all the necessary financial information as it was unavailable at the time. The insurer also noted that the accountant's opinion that the income replacement benefit should be calculated on the basis that the applicant was an employee was equivocal. The applicant stated that he was an employee at the time of the motor vehicle accident since he was working for an incorporated entity, receiving a salary and T4 slips. The applicant took the position that the insurer did not make further requests for the financial documentation after the applicant's meeting with the accountant in 2001, and therefore the insurer was now estopped from raising the issue of employment status. The parties did not seek a calculation of the actual quantum of any income replacement benefit that may be potentially found owing by a hearing arbitrator.

The preliminary issue is:

Is Wawanesa estopped from raising the issue of the applicant's employment status?
Was Mr. Passarello an employee or self-employed at the time of the motor vehicle accident pursuant to section 6 of the Schedule?

Result:

Wawanesa is not estopped from raising the issue of the applicant's employment status.
Mr. Passarello was self-employed at the time of the motor vehicle accident.

EVIDENCE AND ARGUMENT:

At the time of the motor vehicle accident, the applicant was working in his own locksmith business, Raceway, which was a subsidiary of Ace Locksmiths Inc. ("Ace"). The applicant testified that he started in the locksmith business as a teenager before leaving the business and going into wholesale. It was in 1996 that he returned to the locksmith business after purchasing Raceway which was set up as a sole proprietorship. He built up this business and testified that in 1998 he purchased another locksmith business and once volume increased decided to incorporate Ace. According to the applicant's testimony, it was in 1999, when volume from the new business became high, that he commenced paying himself a salary of $500 per week which was increased in 2000 to $800 per week. In the year before the accident, the applicant stated that there were 6 people working for the company including himself, another locksmith who was on the road, two people in the store and two people in the office all of whom were paid a salary. In the application for accident benefits, the applicant indicated that he was an employee at the time of the accident and an employer's confirmation of income was completed by his spouse, the office manager, confirming that he earned $800 per week.

The applicant testified that he incorporated Ace on October 7, 1998 and confirmed that he was the president, only director and only shareholder of the corporation and remained so for the entire time up to the accident. He confirmed that he made all the major decisions for the corporation. The applicant testified that he worked "crazy hours" constituting approximately 10 to 12 hours per day and that he was constantly on call. He noted that he completed a lot of overtime but was not paid for it, as he was on salary. The applicant stated that prior to incorporation, he took draws from his company, but after incorporation he considered himself an employee and started to pay himself a salary, though not until about 8 months after actual incorporation.

Ms. Jones, rehabilitation services advisor at Wawanesa, testified on behalf of the insurer. She confirmed that the insurer commenced payment of an income replacement benefit as if the applicant was an employee, based on the information supplied by the applicant after the accident. She noted that it was upon receipt of a medical report, containing information that the applicant may have been self-employed before the accident, when the insurer informed the applicant that an accountant would be required to look at his income information. In its letter dated August 30, 2000, the insurer informed the applicant that they were assigning an accountant from McCully & Associates ("McCully") to conduct an income assessment.² She testified that after a meeting on February 28, 2001 with the claims manager, a representative from McCully, the applicant and his broker, it still could not be determined if the applicant was self-employed or not. As such, the insurer continued to pay an income replacement benefit at the weekly rate of $400 based on the applicant being an employee given the information in the file at the time.

On cross-examination, Ms. Jones agreed that a March 2, 2001 letter from McCully concluded that there was a strong argument for the applicant's income replacement benefit at $400 and she agreed that McCully presumed that the applicant was an employee.³ Ms. Jones agreed that Wawanesa continued to pay income replacement benefits for 5 years after the March 2, 2001 letter stating that the insurer believed the information the applicant provided. She stated that the information supplied was not complete in its entirety but provided a basis for the insurer to pay an income replacement benefit which it agreed he was entitled to at the time. Ms. Jones referred to the information that McCully requested which was not provided by the applicant but did not refer to any additional requests by the insurer for this information following the letter of March 2, 2001.

Based on the applicant's testimony, it appears that at some point in November 2000, the insurer ceased payment of the income replacement benefit. It is apparent in a letter from the insurer to the applicant dated February 22, 2001 that the income replacement benefit was reinstated prior to the meeting between McCully and the applicant which took place on February 28, 2001.⁴ The applicant stated that at the meeting McCully asked him for copies of his paycheques and once he supplied same, the accountant concluded that he was an employee of his company. The applicant referred to the March 2, 2001 letter from McCully where they stated that upon review of the cheques "it is clear that Mr. Passarello was drawing a regular weekly wage of $800.00 at the time of the accident", concluding that there was "a strong argument that his Income Replacement Benefits should be based on his income from employment in the 4 weeks pre accident." The applicant stated that following the meeting with McCully, Wawanesa did not make further requests for other income documentation prior to March 2006 when the benefit was terminated.

The applicant testified that prior to October 1998, he considered himself to be self-employed as a sole-proprietor but after incorporating and up to the time of the accident he stated that he considered himself as an employee of the business. The insurer referred to the applicant's 1998 income tax return where the only income claimed was from self-employment. The applicant stated that his accountant had prepared the 1998 return and could not explain why it did not account for his being an employee in that year as well. The applicant was also asked about his 1999 income tax return, showing only income from employment, which was not filed until June 6, 2003, more than 3 years after the accident. The applicant could not explain the delay in filing the 1999 return but pointed out that he was entitled to a refund and therefore was not required to file by April 30, 2000.

The applicant was also referred to a discrepancy between his 1999 and 2000 income tax returns which showed total earnings at $17,000 and $17,360 respectively and the employer's confirmation of income form that indicated he earned $41,600 per year. The applicant could not explain this discrepancy. The applicant was asked about his trouble getting his books up to date after the accident and the insurer's agreement to pay a certain amount to assist with this. The applicant agreed that the insurer did offer to pay for this but noted that he never submitted a bill to the insurer for same.

Insurer's Submissions

The insurer stated that the applicant himself conceded that he was self-employed as evidenced from the application for mediation dated August 17, 2007.⁵ On the form, under the heading "Weekly Benefit" the applicant marked that duration and quantum were in dispute. Also, in the explanation box on the application for mediation the applicant wrote the following:

The Insurer has failed to properly calculate the losses of the applicant's business and add same to the base quantum it has calculated ($400), even though the insured's business has been in steady decline over the past 6 years and is now "wrapping up" after closing several stores and laying off the majority of staff (*all contemporaneously cited in the Insurer's own exam reports). Economical and Welsh applies to this Bill 59 loss meaning weekly quantum can exceed $400/week.

The insurer referred to the report of mediator, dated November 26, 2007, which states under the issue heading "income replacement benefit," that the applicant claimed entitlement "in an amount to be determined from April 1, 2006 to date and ongoing." The insurer also noted that the applicant cited a claim for self-employed business losses in the application for arbitration. As well, the insurer referred to the pre-hearing letter dated July 2, 2008 where the arbitrator in setting out the issue of income replacement benefit, identified the applicant as a self-employed locksmith.

The insurer referred to its attempt to determine if the applicant was an employee or self-employed in 2000 and 2001 noting that there was no final determination made but that payments continued in good faith based on the evidence in their file at the time. The insurer stated that there could be no prejudice in a finding that the applicant was self-employed given his own filing of the mediation and arbitration applications wherein he claimed same. As well, the insurer referred to its letter of March 13, 2009 where it stated that there would be no claim for repayment of any past-IRBs paid. The insurer noted that one of the documents, the 1999 income tax return, may have assisted the insurer to determine that the income was from self-employment at the relevant time, was not a document that was available to the insurer at the time it was making its determination in 2001.

The insurer referred to the Guideline for Identifying Self-employed Individuals (the Guideline) and cited Iankilevitch and CGU Insurance Company of Canada⁶, where the Delegate stated that the Guideline was not an exhaustive statement of law noting that FSCO arbitrators take a functional approach when determining if the applicant was self-employed or an employee. The insurer submitted that in this case all indices were that the applicant was self-employed.

The insurer also referred to Piper and Zurich Insurance Company⁷, contained in the applicant's brief of authorities, where the applicant who worked for his own corporation was found to be an employee of said corporation. The insurer argued that in Piper there was a long-standing practice of the applicant being paid in weekly draws and issuing T4 slips unlike the present case where the income tax return for 1998 only shows income from self-employment, and there was no independent verifiable proof that any T4s were provided before the accident. The insurer emphasized the three year delay in filing the 1999 income tax return noting that the information on the employer's confirmation of income did not reflect what was declared to Revenue Canada and also that there were no deductions made for employment insurance, all of which was consistent with the applicant being self-employed before the accident.

The insurer stated that the crux of the estoppel argument was that the insurer did not request additional documentation in 2001. It stated that to prove estoppel, the applicant must show that there has been detrimental reliance on something that was said or done. The insurer argued that since estoppel was based on equitable principles, the applicant must have "clean hands" in order to prove estoppel. It stated that there was no evidence of reliance on the insurer treating him as if he was an employee, given the applicant's own position and no evidence of prejudice given that there was no claim for repayment of past income replacement benefits paid. The insurer stated that McCully's March 2, 2001 letter indicates that there were still questions remaining on the issue of employment status and therefore there could be no detrimental reliance.

Applicant's Submissions

The applicant stated that after the meeting with McCully, the accountant asked for certain documents which were provided before making a determination that his income replacement benefit was based on the 4 weeks before the motor vehicle accident. The applicant stated that the implication was that he was an employee. The applicant stated that the key issue was that the insurer did not ask for further income documentation after this March 2, 2001 letter for at least five years up to the time of cut-off.

The applicant stated that the crux of the issue was estoppel as the documents were available to the insurer, however, they did not request them. The applicant stated that the March 9, 2009 letter from the insurer's counsel was the first time that the issue of whether the applicant was self-employed was raised by the insurer since 2001. The applicant points to the insurer's response to the application for arbitration where it stated that the quantum paid for an income replacement benefit was appropriate. The applicant acknowledged that he had raised the issue of quantum but stated that it was resolved by the pre-hearing arbitrator when he stated in the pre-hearing letter that the claim for an income replacement benefit was $400 per week.

The applicant referred to the Guideline which sets out that if an applicant derived their income from a corporation they were to be considered an employee for the purpose of determining the income replacement benefit. The applicant stated that he incorporated his business in October 1998 and the records show that a salary was commenced in May 1999 and continued up to the time of the accident and therefore should be considered an employee. The applicant relied on the arbitration and appeal case, Piper, where an applicant who was seeking an income replacement benefit was found to be an employee where he similarly decided the bonus paid to himself, drew money for personal expenses and was the controlling shareholder.

The Applicant relied on Miller and Optimum Insurance Company Inc.,⁸ on the issue of estoppel, stating that an insurer can be estopped from challenging the quantum of income replacement benefit. The applicant stated that there may have been further relevant documentation but Wawanesa did not request them and as late as filing its response to the arbitration, appeared satisfied that it had paid an appropriate amount for the income replacement benefit. The applicant stated that his income replacement benefit was cut off in November 2000, presumably so that the insurer could address the issue of self-employment and that re-instatement, showed that the insurer was satisfied, at the time, that the applicant was an employee. By raising the issue now, the applicant stated, leads to a revisiting of the calculation.

The applicant submitted that the deductions relating to his 1999 income were made in a timely manner despite it being filled in 2003 and pointed out that there was no penalty for a taxpayer filing a tax return beyond April 30, of the relevant year, if they are entitled to a refund.

ANALYSIS:

Estoppel

The applicant referred to Miller to support his claim that the insurer is estopped from claiming that he was self-employed when it dealt with him as an employee for the entire time it paid an income replacement benefit after the McCully meeting. In Miller, the applicant provided an application for accident benefits along with an employer's confirmation of income completed by his father and the insurer commenced payment of an income replacement benefit at $400 and did so for six years. It was after a 6 year timeframe that the insurer alleged fraud and took the position that the applicant was not an employee, however by that point, the applicant, relying on the insurer's actions, did not keep the pre-accident employment information that would allow him to prove his pre-accident earnings. The applicant raised the issue of estoppel and the arbitrator agreed that it could be raised in conjunction with a s. 47 repayment request. The present case is distinguished given that Mr. Passarello's income records were still available, the insurer put the applicant on notice within months of learning that there may be an issue regarding his employment status and there was no claim for repayment pursuant to s. 47 of the Schedule.

Miller confirms that a Commission arbitrator has the jurisdiction to entertain arguments that are based on equitable principles such as estoppel noting that the strength of the estoppel argument depends on the facts. I find that the evidence shows that the issue of whether Mr. Passarello was self-employed or an employee at the time of the accident was never fully resolved. I do not accept that the actions of the insurer after the February 28, 2001 meeting signified that they fully accepted that the applicant was an employee given that McCully's opinion was not unequivocal. I accept the evidence of Ms. Jones that the insurer paid an income replacement benefit at the rate it did given that this was all the information it had in the file at the time and it was clear to the insurer that there was entitlement to an income replacement benefit. Also, I find that, from at least August 17, 2007, the date of the application for mediation, until at least March 10, 2008, the date of the application for arbitration, the applicant himself took the position that he was self-employed and therefore has not proved estoppel applies.

Self-Employed or Employee

An income replacement benefit is calculated in accordance with s. 6 of the Schedule and makes a distinction in how to quantify the benefit between individuals who are self-employed and those considered employees. Section 7 of the Schedule sets out the maximum amount of the income replacement benefit, and at the time of Mr. Passarello's motor vehicle accident, a person who was self-employed may be eligible for an income replacement benefit beyond the maximum payable to an employee, being $400. This was set out in the appeal decision Welsh and Economical Mutual Insurance Company⁹, where the Director found that the plain meaning s. 6 and s. 7 of the Schedule led to the conclusion that someone who was self-employed may be eligible for an income replacement benefit beyond the $400 per week by adding 80 per cent of post-accident reasonable business losses. In Welsh, the Director noted that s. 7 of the Schedule had been amended as of October 1, 2003 and therefore the income replacement benefit can only be quantified at a weekly rate above $400 for self-employed individuals who were involved in a motor vehicle accident prior to the amendment.

The applicant testified that as soon as he incorporated his business he no longer considered himself self-employed but an employee of same. Since he incorporated the business in early October 1998, I agree with the insurer that his income tax return from 1998 should show a mix of income from self-employment for the period pre-dating the incorporation and income from employment for monies received after the incorporation. This is not the case and, in the applicant's testimony, he stated that he did not commence paying himself a salary until 1999 once the company's volume increased and these cheques and stubs were provided to McCully. While this may show that the applicant continued treating his business in the same manner pre-and post-incorporation, I give this particular evidence little weight given that it is in reference to the 1998 tax year and the applicant claimed employment income only in both 1999 and 2000.

At the preliminary issue hearing, the applicant argued that since he was working for an incorporated entity, he should, pursuant to the Guideline, be considered an employee and not self-employed. The Guideline issued pursuant to s. 268.3 of the Insurance Act states that:

For the purposes of the SABS, an individual is considered to be self-employed if the business he or she derives his or her remuneration from is not incorporated under any law. For example, sole proprietorships and partnerships are considered to be self-employment situations. If the individual derives his or her remuneration from an incorporated business, then he or she is considered to be an employee of the corporation.

The Guideline sets out elements of a traditional self-employment situation as follows:

TRADITIONAL SELF-EMPLOYMENT SITUATION

THE INDIVIDUAL:

is an owner of an unincorporated sole proprietorship or a partner in a partnership (other than a limited partner).
has an established location where business transactions take place.
participates in the everyday operations of the business (not just an investor or receiving remuneration for purposes of income splitting).
determines own method and schedule for accomplishing tasks.
determines own hours and may not necessarily work a set number of hours per period (i.e. 40 hour week).
negotiates the price(s) of product(s) or fee(s) for service(s) with the customer or client with the exception of regulated fields (i.e. physicians).
determines the annual income as his or her profit from the business according to the Income Tax Act (Canada) and Income Tax Act (Ontario).
is ineligible for regular Employment Insurance benefits.
contributes the employer and employee contributions to Canada Pension Plan (CPP) for his or her own pension plan.
collects and remits all taxes to different levels of government according to each respective tax legislation (i.e. GST, PST, source deductions from employee(s)).

In Iankilevitch and CGU Insurance Company of Canada the Delegate makes clear that the Guideline is not an exhaustive statement of law and that "deciding whether a claimant is self-employed or a corporate employee requires consideration of many factors."¹⁰ The Delegate also stated that when determining if an individual was self-employed or an employee:

Commission adjudicators have consistently taken a functional approach that prefers substance over form. Where the corporation is the claimant's alter ego, such that the claimant treats the company's revenues and expenses as her own, she will generally be treated as self-employed. The objective is to ensure that the insured person receives an income replacement benefit that fairly and realistically reflects her actual income situation, avoiding both over- and under-compensation.¹¹

The applicant argued that since he was receiving a regular paycheque and was issued T4s that he should be considered an employee and that this was sufficient for McCully at the relevant time. I note that these two factors are not the only consideration in a determination of the applicant's employment status. The arbitrator stated in Piper and Zurich Insurance Company that:

The existence of a corporate structure and the issuance of a T4 statement by that company does not preclude further inquiry into the income of an insured person. This is especially true where a small, closely-held corporation is run by a sole or majority shareholder whose activities generate all or most of the revenue and expenses of the company. In such cases, it may be an easy matter to ignore the corporate structure and attribute the income, expenses, and ceasing expenses of the corporation directly to the activities of the insured person, to reach an accurate assessment of the weekly income benefit payable.¹²

The applicant relied on Piper for the proposition that someone in a closely held corporation should be considered an employee. Although in Piper the arbitrator found that it was not an appropriate case to pierce the corporate veil, she accepted that it was appropriate to go "beyond mere form, to examine the substance of each individual's financial situation within the overall pre-accident context."

Although in Piper the applicant was found to be an employee of his own corporation, I note that in her analysis, the arbitrator emphasized the forty year history of Piper Electric as a corporation for which Mr. Piper worked receiving a regular salary. The arbitrator examined the business relationship between Mr. Piper and his son, who also worked for the business, noting that it had become "a long-term, mutually beneficial relationship that is facilitated by the legal structure of the company."¹³ The Arbitrator also emphasized the retained earnings of the corporation which was intended to provide a financial cushion to the employees during slow times. The Arbitrator referred to the term "self-employment" noting that it was defined in Raickovic and Gore Mutual Insurance Company¹⁴ as follows:

earning income directly from one's own business, trade, or profession rather than as a specified salary or wages from an employer. (Webster's Third International Dictionary). The Dictionary of Canadian Law emphasizes the fact one is engaged in an occupation on one's own behalf.¹⁵

I also note that the Guideline defines "employee" as "an individual who is hired to perform pre-determined tasks/work in a business in exchange for remuneration." In the Piper appeal, the Director agreed that Mr. Piper was an employee of his corporation, noting "a consistent pattern of salary-based payments, and treatment of Mr. Piper as an employee, rather than a self-employed majority shareholder."¹⁶

I find from the applicant's testimony that although he may have considered himself an employee because of the incorporation in 1998, his role as a self-employed businessperson continued from the time of incorporation up to the date of the motor vehicle accident. The Guideline is helpful in that it identifies factors of a self-employed individual of which I find the applicant would meet many. The applicant's evidence supports that he continued to be the controlling mind of the corporation for this entire period, he was the president, only director and only shareholder of the corporation and remained so for the entire time up to the accident. The applicant confirmed that he made all the major decisions for the corporation. The applicant testified that he did not work a set number of hours but instead worked "crazy hours" constituting approximately 10 to 12 hours per day and was constantly on call. He noted that he completed a lot of overtime but was not paid for it as he was on salary. The applicant was not paying employment insurance as evidenced on his T4s and I note that he claimed he was self-employed prior to getting back into the locksmith business, therefore would be ineligible for employment insurance benefits.

Indeed, the applicant himself stated in his application for arbitration regarding his claim for an income replacement benefit the following:

QUANTUM

The Applicant submits and the fact is that the Insurer has failed to properly quantify his weekly income benefit entitlement during the entirety of the post-accident period by refusing to calculate the quantum of additional losses which would be added to his baseline $400/week stipend. The Insurer has been made aware of their duty to do so via the decisions in Welsh and Economical and Johnston and AXA and yet has failed to adhere to their guidance on adding losses beyond the purported $400/week cap which they originally expressed to the Applicant was his maximum allotment.
The Applicant submits that he has estimated that 80% of his total net past loss of income for the period of May 19, 2000 to March 31, 2006 is $157,575.00. As he received Income Replacement Benefits payments of $400.00 per week in those 306 weeks, totalling $122,400.00, the further net past income loss is therefore at least $35,175.00, not including those additional periods before his businesses complete collapse in the fall of 2007.

It is apparent from the evidence, that at some point after the release of Welsh, the applicant took the position that he was self-employed and not an employee which was something the insurer was trying to deduce near the onset of the claim. This change of position is an important consideration in my analysis of whether the applicant was actually self-employed or an employee at the time of the accident. I find that the applicant continued to treat his business after incorporation and up to the time of the motor vehicle accident as a self-employed individual and for the purposes of the Schedule should be treated as self-employed at the time of the motor vehicle accident.

I disagree with the applicant's submission that the pre-hearing arbitrator had determined that there was no dispute concerning the $400 quantum of the income replacement benefit. In his pre-hearing letter, the arbitrator identified the income replacement benefit as an issue in dispute and indicated that the quantum was $400 but also stated that the applicant was a self-employed locksmith. On its face, it does not appear that the pre-hearing letter clarified the issue of self-employed or employee and I do not rely on setting of the quantum at $400 to be an indication that there was agreement amongst the parties on this issue. I also reject the applicant's submission that the insurer cannot raise this issue since quantum was not mediated by the insurer and find that the report of mediator makes clear that quantum of the income replacement benefit was yet to be determined therefore identifying it as an issue that remained in dispute.

EXPENSES:

The issue of expenses of this preliminary issue hearing was not addressed by the parties and I encourage them to deal with this issue directly.

October 16, 2009

Alec Fadel Arbitrator

Date

Financial Services Commission of Ontario