C.B.E.R.R. Wood Products Inc. v. M.N.R., docket 97-1351-UI

Date: 19991217

Dockets: 97-1351-UI; 97-1354-UI; 97-1355-UI; 97-1605-UI

BETWEEN:

C.B.E.R.R. WOOD PRODUCTS INC., EVERETT EISNER,

Appellants,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

Cain, D.J.T.C.C.

[1] These are three appeals by C.B.E.R.R. Wood Products Inc. (hereinafter called the "Appellant") and the Minister of National Revenue (hereinafter called the "Respondent"), in respect to a ruling dated July 24, 1996 that Richard J.S. Eisner, Robert Westcott and Everett Eisner (hereinafter collectively referred to as the "Workers") were employed in insurable employment pursuant to contracts of service during the period January 1 to June 29, 1996 and during the period June 30 to July 24, 1996 (hereinafter referred as the "periods in question") within the meaning of the Unemployment Insurance Act and the Employment Insurance Act (hereinafter referred to as the "UI Act" and EI Act" respectively) and an appeal by Everett Eisner, one of the Workers, in respect to the same ruling as it personally affects him.

[2] At the outset, the Appellant and the Workers agreed that the appeals be combined and that all evidence led be applied as if the evidence had been called separately in each appeal.

[3] The assumptions on which the Respondent based his ruling are the same as they relate to the Appellant and to each of the Workers and are reproduced here slightly edited to properly identify the parties in the combined appeals but their intent and substance is not changed.

(a) the Appellant was a corporation duly incorporated under the laws of the Province of Nova Scotia;

(b) during all material times each of the Workers held one preferred voting share of the Appellant;

(c) the Workers were also the only directors of the Appellant;

(d) the Appellant was engaged in the manufacture of kitchen and bathroom cabinets;

(e) tools and equipment used in the business, and valued at $86,000.00, were owned by the Appellant;

(f) the Workers had not invested any money in the business;

(g) the Workers did not bring any tools and equipment into the business;

(h) the business was located in premises separate from the Workers' residences;

(i) the Workers' duties were manufacturing of cabinets, sales and management of the business;

(j) the Workers could not make business decisions for the Appellant;

(k) all business decisions were made by the board of directors;

(l) the Workers were under the direction and control of the Appellant;

(m) the Workers were each paid at the rate of $480.00 per week which was determined by the Appellant's board of directors;

(n) the Workers received other monies from the Appellant only as a shareholder;

(o) the Workers completed time cards to report hours of work;

(p) the Workers were not required to incur expenses in the performance of their duties;

(q) the Workers signed loans on behalf of the Appellant in their capacity as a shareholders and directors;

(r) there was a contract of service between the Appellant and each of the Workers.

[4] The Appellant and the Workers agreed with all of the assumptions of the Respondent with the exception of (r) but with comments in respect to (f), (j), (l) and (o).

[5] In respect to (f), the Appellant and Workers testified that in 1990 because of a bankruptcy of one of the Appellant's customers, the Appellant was required to borrow approximately $37,000 to pay its suppliers when the customer defaulted on the contract. The Workers were required to guarantee the loan which was repaid in 1994. Documents in support of that loan were filed with the Court as Exhibits A-1 to A-9 inclusive. The Workers had guaranteed all previous financing of the Appellant.

[6] In respect to (j), the Workers testified that in their capacity as shareholders they made business decisions for the Appellant.

[7] In respect to (l), each of the Workers had a vote.

[8] In respect to (o), the time cards were not completed for purposes of payroll computation since the Workers drew a sum of $470 per week irrespective of the time that they worked. The time cards were completed in order to cost, the work being performed in respect to contract jobs. This system was employed to determine whether they were performing the contract in accordance with their original time estimate, one of the factors on which the contract price was based.

[9] The Worker, Everett Eisner, testified as to the creation of the company and in particular the talents of the Workers. Each, prior to the incorporation of the Appellant, were working as cabinet makers and only joined together because of an appreciation of the skill that each recognized in the other.

[10] He further testified that each of the Workers brought to the Appellant a skill without which the Appellant could not or would not operate. The Workers considered the Appellant to be an entity through which they would combine their skills to increase their capacity to produce on a large scale and increase their earning power. For example when there was a slight turn down in the building trade, as there was from time to time, he would leave the Appellant and employ his skill teaching at a community college. When activity increased he would return.

[11] He testified that there was no supervision on the job as such. Each of the Workers knew what their respective skill was and brought it to bear on the various projects undertaken. Without that kind of cooperation the business could not be successful.

[12] The history of the common-law development of the criteria of the employment relationship was definitively set out in the leading case of Weibe Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553. It started with the control test as set down by Baron Bramwell in Regina v. Walker (1858), 27 L.J.M.C. 207 at 208:

"It seems to me that the difference between the relations of master and servant and of principal and agent is this: A principal has the right to direct what the agent has to do; but a master has not only that right but the right, to say how it is to be done."

[13] The above test was adopted by the Supreme Court of Canada in Hôpital Notre-Dame de l'Espérance et Théoret v. Laurent et al., [1978] 1 S.C.R. 605 at 613 where the Court stated "the essential criterion of employer-employee relations is the right to give orders and instructions to the employee regarding the manner in which to carry out his work".

[14] And Professor P.W.S. Atiyah in Vicarious Liability in the Law of Torts, London, Butterworths, 1967, page 41 stated:

"the control test as formulated by Bramwell, B ... wears an air of deceptive simplicity, which ... tends to wear thin on further examination".

[15] Commenting on this quote the late Mr. Justice McGuigan, who authored the judgment in Weibe (supra) said at page 558:

"A principal inadequacy is its apparent dependence on the exact terms in which the task in question is contracted for: where the contract contains detailed specifications and conditions, which would be the normal expectation in a contract with an independent contractor, the control may even be greater than where it is to be exercised by direction on the job, as would be the normal expectation in a contract with a servant, but a literal application of the test might find the actual control to be less. In addition, the test has broken down completely in relation to highly skilled and professional workers, who possess skills far beyond the ability of their employers to direct. (the underlining is the Court's)

[16] McGuigan J. referred to the entrepreneurial test developed by the late Justice W. O. Douglas of the Supreme Court of the United States in judicial writing which posited four differentiating ear marks of the entrepreneur: control, ownership, profits and losses. McGuigan J. then recognized that Lord Wright applied that test in Montreal v. Montreal Locomotive Works Ltd. et al., [1947] 1 D.L.R. 161, where at pages 169-70 he said in part:

" ... In many cases the question can only be settled by examining the whole of the various elements which constitute the relationship between the parties. In this way it is in some cases possible to decide the issue by raising as the crucial question, whose business is it, or in other words by asking whether the party is carrying on the business, in the sense of carrying it on for himself or on his own behalf and not merely for a superior ..."

[17] The Court in Weibe (supra) then went on to consider the organizational test as developed by Denning L.J. (as he was then) in Stevenson, Jordan and Harrison Ltd. v. Macdonald and Evans, [1952] 1 T.L.R. 101 where the learned Justice distinguished a contract of service from a contract for services. In the former he said the man is employed as part of the business and his work is done as an integral part of the business whereas in the latter, the work, although done for the business is not integrated into it but only accessory to it. McGuigan J. was of the view that the Lord Wright test was more general than the Lord Denning test and said at page 562:

" ... I interpret Lord Wright's test not as the fourfold one it is often described as being but rather as a four-in-one test, with emphasis always retained on what Lord Wright, (supra), calls "the combined force of the whole scheme of operations", even while the usefulness of the four subordinate criteria is acknowledged."

Lord Denning's test may be more difficult to apply, as witness the way in which it has been misused as a magic formula by the Tax Court here and in several other cases cited by the Respondent, in all of which the effect has been to dictate the answer through the very form of the question, by showing that without the work of the "employees" the "employer" would be out of business ... As thus applied, this can never be a fair test because in a factual relationship of mutual dependency it must always result in an affirmative answer. If the businesses of both parties are so structured as to operate through each other, they could not survive independently without being restructured. But that is a consequence of their surface arrangement and not necessarily expressive of their intrinsic relationship. (the underlining is the Court's.)

[18] McGuigan J. then at page 563 quoted with approval the following comments by Professor Atiyah (supra) at page 38 of his article:

"It is exceedingly doubtful whether the search for a formula in the nature of a single test for identifying a contract of service any longer serves a useful purpose ... The most that can profitably be done is to examine all the possible factors which have been referred to in these cases as bearing on the nature of the relationship between the parties concerned. Clearly not all of those factors will be relevant in all cases, or have the same weight in all cases. Equally clearly no magic formula can be propounded for determining which factors should, in any given case, be treated as the determining ones. The plain fact is that in a large number of cases the court can only perform a balancing operation, weighing up the factors which point in one direction and balancing them against these pointing in the opposite direction. In the nature of things it is not to be expected that this operation can be performed with scientific accuracy.

This line of approach appears to be in keeping with what Lord Wright said in the little-known Privy Council decision in Montreal Locomotive Works ..." (the underlining is the Court's)

McGuigan J. continued:

" ... Of course, the organization test of Lord Denning and others produces entirely acceptable results when properly applied, that is, when the question of organization or integration is approached from the persona of the "employee" and not from that of the "employer", because it is always too easy from the superior perspective of the larger enterprise to assume that every contributing cause is so arranged purely for the convenience of the larger entity. We must keep in mind that it was with respect to the business of the employee that Lord Wright addressed the question "Whose business is it?"(the underlining is the Court's.)

[19] The Crown referred the Court to the case of Whelan v. Canada (Minister of National Revenue-M.N.R. [1992] T.C.J. No. 495, DRS 94-03538, Action Nos. 92-195(UI) and 92-106(UI) in support of its position that the Workers were employees. A husband and wife, shareholders of a resort company called Realities, were also employed to run the business. They made application for benefits during the off season. The Respondent contended that they were not entitled to unemployment benefits because neither of them were employed in an employer-employee relationship but were engaged in a business on their own accounts. Beaubier T.C.J. said the following on the question of control:

"Counsel for the Crown laid great emphasis upon the Crown's view that the two Appellants were not subject to the control of Realties, (sic) rather, the Crown's view is that the Appellants controlled there own work. Realties (sic) is a small, one-enterprise corporation. The Court accepts Mrs. Whelan's statement that Mr. Whelan is the boss. The business and its operation are not a sham. Mr. Whelan referred to Realities as a limited liability corporation and it is that. Both Appellants are guarantors of its financing. But the business has its own impetus and financial constraints require that certain jobs be done on time or it will fail. There is no one else to do them but the Appellants and, because it is a small business located in a small, specialized, competitive market, they have to be done well and on time by very few people or the business will fail. For these reasons, in the context of a small business, the Court finds that Realities, the corporate employer, exercises control over the Appellants. (the underlining is the Court's)

[20] In the case at bar, the Appellant had no boss, it being for all intents and purposes a three-way partnership where the majority ruled. While the resort had its own impetus in that it was located in a resort area and was equipped to handle the tourist trade, the Appellant had no impetus of its own. The Workers were that impetus by virtue of their skills. The plant and machinery was useless without those skills. The Appellant would only exercise the control of "where" and "when" but not "how".

[21] The Workers were the guarantors of the financial performance of the Appellant although that factor standing alone would not support a finding that their engagement was a contract for services.

[22] At the outset it should be understood that a person can contract with the company in which they are shareholders and/or directors. See Lee v. Lee's Air Farming Ltd., [1960] 3 All E.R. 420 where the Privy Council found that a shareholder who held 2,999 of the 3,000 shares forming the nominal capital of the company and who was also the governing director, had a contract of service with the company and operated in the dual capacity of a director and servant.

[23] The skill of the Workers is the dominant factor in this relationship and the fact that the work performed is an integral part of the Appellant's business is the weakest factor. The fact that the businesses of the Workers and the Appellant were so structured so as to operate through each other does hide the true intrinsic relationship of the parties. The Workers could operate independently of the Appellant but the Appellant could not operate independent of the skill of the Workers. Control is not a factor.

[24] The Workers worked for a fixed sum per week. At the end of the year, I presume that if the financial condition of the Appellant permitted, the Workers would vote to declare a dividend at a tax advantage. The total of the salary and the dividend would be their annual remuneration. In reality the Appellant was a vehicle through which they realized their annual income as they would have had they not incorporated but with a tax advantage. This fact does not in my view affect their intrinsic relationship with the Appellant.

[25] In performing the "balancing operation" as McGuigan J. said in Weibe Door (supra), I am satisfied that the evidence led by the Appellant demolishes the assumptions on which the Respondent based his determination. The Respondent called no evidence.

[26] Accordingly, I must substitute my opinion. It should be understood that this opinion is based on the very special facts that exist here, three highly skilled workers who represent the total work force of the Appellant and who together control the Appellant's operation. In another setting the Workers might be considered employees in the true sense of the word.

[27] The appeals of the Appellant and Everett Eisner are allowed and the determinations of the Minister are varied. The Court finds that the Workers were not engaged in insurable employment during the periods in question but were engaged by the Appellant under a contract for services.

Signed at Rothesay, New Brunswick, this 17th day of December 1999.

"Murray F. Cain"

D.J.T.C.C.