E & S Tresses Ltd. v. M.N.R., docket 97-757-UI

Date: 19981113

Docket: 97-757-UI; 97-759-UI; 97-760-UI; 97-761-UI; 97-763-UI; 97-764-UI

BETWEEN:

E & S TRESSES LTD.,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

LORI BRUCE,

and

GAILENE FISCHER,

and

YVONNE CUNNINGHAM,

and

ANGIE DESAUTELS,

and

CHERYL LIVINGSTONE,

Interveners,

AND

BETWEEN:

LORI BRUCE,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

E & S TRESSES LTD.,

and

GAILENE FISCHER,

and

YVONNE CUNNINGHAM,

and

ANGIE DESAUTELS,

and

CHERYL LIVINGSTONE,

Interveners,

AND

BETWEEN:

CHERYL LIVINGSTONE,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

E & S TRESSES LTD.,

and

LORI BRUCE,

and

GAILENE FISCHER,

and

YVONNE CUNNINGHAM,

and

ANGIE DESAUTELS,

Interveners,

AND

BETWEEN:

ANGIE DESAUTELS,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

E & S TRESSES LTD.,

and

LORI BRUCE,

and

GAILENE FISCHER,

and

YVONNE CUNNINGHAM,

and

CHERYL LIVINGSTONE,

Interveners,

AND

BETWEEN:

GAILENE FISCHER,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

E & S TRESSES LTD.,

and

LORI BRUCE,

and

YVONNE CUNNINGHAM,

and

ANGIE DESAUTELS,

and

CHERYL LIVINGSTONE,

Interveners,

AND

BETWEEN:

YVONNE CUNNINGHAM,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

E & S TRESSES LTD.,

and

LORI BRUCE,

and

GAILENE FISCHER,

and

ANGIE DESAUTELS,

and

CHERYL LIVINGSTONE,

Interveners.

Reasons for Judgment

Porter, D.J.T.C.C.

[1] These appeals were heard on common evidence by consent of the parties at Edmonton, Alberta, on June 15, 1998.

[2] Evidence was given by Rupert Engen (hereinafter called "Engen") on behalf of E & S Tresses Ltd., the "Company". Although each of the individual Appellants and Intervenors, all hairstylists, (collectively called the "Intervenors") were present in Court for the hearing of the appeals. Lori Bruce was elected to give evidence on their behalf and it was agreed that her evidence would be representative of each of their situations.

[3] The Company and the Intervenors each have appealed the determination of the Minister of National Revenue (the "Minister"), made on his behalf by the Chief of Appeals Division at Edmonton, dated February 3, 1997, that for the period January 1, 1995 to May 31, 1996, the Intervenors were employed in connection with a hairdressing establishment, of which none of them was the owner or proprietor. The Minister thus decided that although each of them was a self-employed hairdresser, each of their employment was included in "insurable employment". The decision was said to be based on paragraphs 3(1)(a) and 4(1)(c) of the Unemployment Insurance Act (the "Act") and paragraph 12(d) of the Unemployment Insurance Regulations ("Regulation 12(d)"). A similar decision was sent to each Appellant.

[4] The issue in these cases is whether or not the working arrangement between each of the Intervenors individually and the Company amounted to "insurable employment" under the Act. The Company and the Intervenors all maintain that they had simply a lease, as opposed to an employment arrangement, and that accordingly the premiums assessed by the Minister are not applicable. They also maintain that their arrangement falls outside the purview of the legislation as they each had their own business, which they owned. The issue thus hangs upon whether Regulation 12(d) applies to their situation or not.

The Law

[5] Paragraph 3(1)(a) of the Act reads as follows:

"3(1) Insurable employment is employment that is not included in excepted employment and is

(a) employment in Canada by one or more employers, under any express or implied contract of service or apprenticeship, written or oral, whether the earnings of the employed person are received from the employer or some other person and whether the earnings are calculated by time or by the piece, or partly by time and partly by the piece, or otherwise;

[...]"

[6] It is clear that, generally speaking, this paragraph of the Act includes in the unemployment (now employment) insurance scheme set up by Parliament, contracts of service, that is employer/employee relationships in the normal sense of those words and not contracts for services, that is to say contracts with independent contractors, as those situations have been defined by the Courts (see Wiebe Door Services v. M.N.R. [1986] 3 F.C. 553. Clearly the broad approach of the Act is to exclude persons in business for themselves or persons closely related to and employed by them.

[7] However, paragraph 4(1)(c) of the Act provides some exceptions to this broad approach. It reads as follows:

"4.(1)

...

(c) any employment that is not employment under a contract of service if it appears to the Commission that the terms and conditions of service of and the nature of the work performed by persons employed in that employment are similar to the terms and conditions of service of and the nature of the work performed by persons employed under a contract of service;"

[8] In exercise of this power, afforded by Parliament, the Commission has passed Regulation 12(d), which reads as follows:

"12.

...

(d) employment of a person in connection with a barbering or hairdressing establishment, where that person

(i) provides any of the services that are normally provided therein, and

(ii) is not the owner or proprietor thereof;"

[9] At first blush, one might consider that use of the word employment would again connote an employer/employee status as opposed to that of an independent contractor. However, the case law from the Supreme Court of Canada and the Federal Court of Appeal clearly indicates that this is not the case. These decisions are obviously binding upon this Court.

[10] In the case of Attorney General of Canada v. Skyline Cabs (1982) Ltd., 5W.W.R. 16, MacGuigan, J. speaking for the Federal Court of Appeal said this:

"The sole issue before the Tax Court was as to the application of subsection 12(e) of the Regulations, and in the light of the Supreme Court of Canada decisions in The Queen v. Scheer Ltd., [1974] S.C.R. 1046 and Martin Service Station v. Minister of National Revenue, [1977] 1 S.C.R. 996, in my view it must be taken as settled law that the word "employment" in that subsection is not to be understood in the narrower sense of a contract of service, the sense in which it was interpreted by the Tax Court, but in the broader sense of "activity" or "occupation". In the Martin case, after emphasizing that the overall scheme of the Act is directed at persons under a contract of serve, Beetz J. went on, supra, at pp. 1004-5, to interpret the legislation differently with respect to the occupation in question:

In order to avoid paying contributions under the Acts [the Unemployment Insurance Acts of 1955 and 1971], some persons might however elect to give to their contractual relationships a form other than that of a contract of service; the impugned enactments, in so far as they enable the Unemployment Insurance Commission to reach such persons, pertain to the category of enforcement provisions and are clearly intra vires. But even leaving out of account any possible intention to evade the Acts, if conditions become such that those who have a contract of employment to perform a given type of work find themselves unemployed, it is most likely that those who perform the same type of work, although they be self-employed, will also find themselves out of work because of the same conditions. It is mainly to protect the latter against this risk of unavailability of work and involuntary idleness that the Acts are extended. Whether they be self-employed or employed under a contract of service, taxi drivers and bus drivers for instance are exposed to the risk of being deprived of work. This risk is, in my opinion, an insurable one, at least under a scheme of compulsory public insurance which was never expected to function on a strict actuarial basis provided it generally conformed to the nature of an insurance scheme, including protection against risk and a system of contributions."

[11] In the Supreme Court of Canada decision The Queen v. Scheer (above) Spence J. delivering the unanimous judgment of that Court expressed the view that the word "employment" for example in paragraph 12(d) of the Regulations has two alternative meanings: either a contract of service or the occupation, business or trade in which the individual is engaged. He said this at pages 1052 and 1053:

"that the meaning of the word "employment" must be gathered from the survey of the statute and the intention of Parliament in using the language employed determined having regard to the context in which it is used ...

I, therefore, am of the view that, at any rate from 1946 to the present time, Parliament in its unemployment insurance legislation has used the word "employment" to include a business, trade or occupation and not solely to designate a master and servant relationship."

[12] Mr. Justice Heald in Sheridan v. M.N.R., 57 N.R. 69 (Fed. C.A.) at page 74 said this:

"Subsection 4(1)(c) applies only to those persons employed in employment not under a contract of service (including self-employed persons) in circumstances where they perform a similar type of work and under similar terms and conditions to those persons who are employed under a contract of service."

[13] It should be remembered when hearing these appeals, that there are two aspects to the unemployment (now "Employment") insurance scheme set up by Parliament. Many people wish to be included so that if they fall upon bad times and have no employment they have a financial security net, upon which they may rely for support. The Minister at times challenges their right to claim benefits, when it is perceived that their employment falls outside the ambit of the established scheme. On the other hand there are others who wish to arrange their affairs so that they are self-reliant and neither wish to pay premiums nor collect benefits. However, for various reasons these latter persons are sometimes included by law within the scheme and are not able to withdraw from it. To some extent that may be to ensure some protection to those who might otherwise be forced into accepting certain employment arrangements just so that employers might not have to make contributions, which might well leave such persons in financial jeopardy upon loss of their employment. This is part of a broad public policy on the part of the government to ensure that those who should have the opportunity to be included in the scheme are not arbitrarily excluded by sophisticated employment arrangements. Nevertheless, whatever the reasons, this Court is constrained to apply the law as it is written and as it has been interpreted by the appellate Courts, and not simply as any party, from their own individual and perhaps narrower perspective, might wish to see it applied, however much that may make a great deal of sense to them in their own particular circumstances.

[14] In summary then, if workers are employees in the strict sense of that word, they are by and large, subject to certain exceptions included in the scheme. If they are not employees in that strict sense, they are not generally included unless they fall within one of the additional classes of business activity set out in the regulations.

[15] If I might paraphrase Regulation 12(d) for a moment, it is clear that if the Intervenors are:

a) carrying on a business activity in connection with a hairdressing establishment,

b) provide the services that are normally provided therein, and

c) they are not the owner or proprietor thereof

their work is included in the scheme as "insurable employment". I note that all three criteria must be met.

[16] The word "establishment", according to the Dictionary of Canadian Law (Duketow and Nurse, Thomson Professional Publishing 1991) means:

"a place of business" or "the place where an undertaking or part thereof is carried on".

According to the Oxford English Dictionary, the word means, among other things: "an institution or business; the premises or personnel of this,"

[17] I am inclined to the view that the Regulation has for its meaning of the word, the premises upon which the business was conducted more so than the business itself or the personnel. I say this as subparagraph (d)(ii) refers to services that are normally provided "therein". If the framers of the Regulation had intended to mean the business itself, they would have used the word "thereby" or "by it" rather than the word "therein", which latter word conveys the sense of being inside something physical. In the same vein the word "therein" can hardly apply to personnel.

The Facts

[18] It is clear that the Company and the Intervenors sought to set up a relationship of independent contractors. In my view without going through the extensive tests provided in law, they clearly succeeded in doing so. The Minister in effect conceded in his determinations that each was self-employed.

[19] It is also clear that each of the Intervenors was involved in employment (read: "business activity") in connection with a hairdressing establishment, (a) above, and that they each provided services that are normally provided therein, (b) above.

[20] In order to decide whether or not all or any of the Intervenors were the "owner or proprietor thereof" referring to the hairdressing establishment, it is necessary to consider their relationship with the Company and decide whether there was one or several "hairdressing establishments". The relationship was governed by the contracts each signed, a sample copy of which was filed as exhibit R-1. First, however it may be useful to review a little history, as it was related to the Court in evidence.

[21] The shares of the Appellant Company were owned 50% by Rupert Engen and 50% by Francesco's Hair Design Ltd. The shareholders of the latter Company were Pat Spadafora and Frank Spadafora. The Company owned the building in which the hairdressing activity was carried on. The Company in years prior to 1990 had operated a hair salon, aesthetician service, make-up artists and nail technicians, which operated under the name of "Mary's Place". Over the years various of these components left. In 1990, a number of hairstylists approached Engen and Spadafora with a view to renting space and sharing common area costs; the majority of them were the present Intervenors. Some of them have left since and Angie Desautels arrived later. The intention of each of them was to set up their own individual business under the same roof. Engen and Spadafora did not want to be involved in hiring staff. Thus, together they decided as a group to lease the building, that is the Intervenors plus Engen and Spadafora, from the Company and each would run his or her own separate operation.

[22] This, they proceeded to do. Contracts were set up as in exhibit R-1. The old signage was taken down and new signage put up under the name of "Francesco's Tresses Hair". The building was a converted house and this name appeared on the new awning put up outside the front of the premises. Below the awning a sign was erected under the heading "E & S Tresses and Associates". On this sign the names of all parties were listed. Each party, including Engen and Spadafora, took out their own individual business licence. Each signed a contract with E & S Tresses Ltd. called a "Service and Expense Contract". This seems to have been done annually and the terms were re-negotiated each year.

[23] The contract in question was signed on January 1, 1995. The first recital, it should be noted, stated that the corporation (E & S Tresses Ltd.) "is a hairdressing salon operating in the City of Edmonton". The Company agreed to provide "apropriate space and chairs", but the specific area was not defined. It also agreed to provide many administrative and support services such as receptionist, office manager, shampoo help, technical help, maintenance help, telephone and utilities, repairs and maintenance of equipment, charge card costs, business and property taxes, liability insurance and signage.

[24] It made clear that the individuals were responsible for their own statutory deductions and expenses, accounting, legal, advertising and education costs.

[25] It provided for the individuals to be independent contractors who could set their own hours of work. All clients' fees for services were to be made directly to the individuals and not to the Company. A monthly fee of $1,575.90 was required to be paid by each individual to the Company. If they became sick or pregnant they had to pay full fee for the first month in which they were absent, and 60% thereof for subsequent months. The agreement could be terminated on 30 days notice and G.S.T. was added onto the fees. That, in short, was the nature of the agreements.

[26] In practice all the individuals set to, doing renovations and setting up their own area as they chose. They each operated independently, kept their own cash receipts and made their own appointments with the help of the receptionist. E & S Tresses Ltd. provided the management and support services and had some full-time employees for this but did not hire any hairstylists. They each ordered their own individual products through Francesco's Tresses. They ordered their business cards in the same way. These were all the same design with just the names interchanged. They had joint meetings and decided how to run the joint operation. If absent, their space was not used by others. They indicated that they had the freedom to sublease if they wished, although none in fact did this.

[27] There were some common entrances to the premises and a common waiting area. Their areas were not physically separated one from the other by walls and doors although they spread out over three floors. The fees they paid to the Company were calculated as follows:

7% to wages

9% to utilities

6% to maintenance

8% to charge cards (they were paid by cheque daily)

50% to products

20% to space rental

[28] They considered the joint management operation as a sort of co-op. The Company however operated the bank account on behalf of this group of people. It struck me that whilst they were clearly operating independent businesses they had a type of joint venture in the management of the communal aspects of their operations, and they then used the Company as a vehicle to carry those out.

[29] If one or more individuals left, at the end of their 30-days notice, they would take with them their goodwill, their equipment and supplies but leave the space and the chairs. The other individuals would carry on in the same way. The departing party would take no capital payout with them.

[30] Those then are the principal facts as I have ascertained them.

Conclusion

[31] There is no doubt that the Intervenors carried on their separate businesses. They clearly did all they could to establish that, and much of their concern at the hearing of these appeals was directed to this point. In this they succeeded. I also gleaned from the evidence that they were extremely honest straightforward and well principled people, who were somewhat upset by the manner in which they had been dealt with by Revenue Canada officials over this matter. However, that is not the issue before this Court.

[32] In actual fact they all carried on their separate businesses in one building under one common banner in which they shared a great deal. It was no doubt an extremely efficient business arrangement. However there was no division of the space such as one might find in a shopping mall where separate businesses are clearly delineated by walls and entrances or as in professional offices in office buildings where each has its own defined space with an individual entrance. Here they all carried on their separate businesses in a communal fashion, whereby an outside observer looking on, could not but come to the conclusion that there was one "business establishment" operating. They each in my view formed part of that establishment, a hairdressing salon. That of course is what the contract said, the Company was a hairdressing salon. I am unable to see a number of different "establishments". There was sufficient community of effort in my mind to say that this was one establishment. In my view the individuals did not own that establishment. They did not own or have a lease of specific space. If I am correct in saying that it was the physical space, then clearly that was owned by the Company not by the Intervenors. They may have formed part of the business establishment to the extent that they contributed to it, but in the end the funds belonged to the Company who owed them a duty to provide the services for which they had contracted. The Intervenors owned nothing but their own goodwill, equipment and products and had any one of them left, "the establishment" would have remained.

[33] In conclusion then I find as follows:

a) The Intervenors were self-employed operating their own independent businesses.

b) The Intervenors were carrying on a business activity in connection with a hairdressing establishment.

c) The Intervenors provided the services which were normally carried on therein, that is to say in such an establishment.

d) The Intervenors were not the owners or proprietors of that establishment.

e) The activity in which they were each engaged was insurable employment under Regulation 12(d).

[34] In the event, the appeals are each dismissed and the determinations of the Minister are confirmed.

[35] In closing, I would urge the officials of the Minister to deal kindly with the Intervenors, in the implementation of this decision. I found them to be good hard working people who genuinely believed that the way in which they set up their business affairs placed them outside the ambit of the unemployment insurance scheme. They were well intentioned, but mistaken. However, they advanced their appeals in a respectful manner and the Court would encourage reciprocation of that respect.

Signed at Toronto, Ontario, this 13th day of November 1998.

"Michael H. Porter"

D.J.T.C.C.