Date: 19971218

Dockets: 96-2165-UI; 96-120-CPP

BETWEEN:

AVONDALE STORES LIMITED,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

Bowie, J.T.C.C.

[1] The Appellant company owns a chain of convenience stores in the Niagara Peninsula of Ontario. These appeals concern the status of the managers of those stores for purposes of the Unemployment Insurance Act[1] (the Act) and the Canada Pension Plan[2] (the Plan). Revenue Canada has taken the position that their employment is under a contract of service, and has accordingly assessed the Appellant for what it says are the required contributions under the Act and the Plan. The Appellant takes the position that its managers are employed pursuant to contracts for services, each operating his or her own business as an independent contractor, and that it is therefore not required to make contributions under either the Act or the Plan in respect of them. As the Federal Court of Appeal has said,[3] my task is to make a careful review of all the evidence, and then apply to the facts that emerge the test which has been formulated in the decided cases.

[2] At the opening of the trial, I was invited by counsel to rule upon the admissibility of two pieces of evidence tendered by the Appellant. The first is a letter written by an officer of Revenue Canada, in which he had, on behalf of the Minister of National Revenue (the Minister), made a determination on an earlier occasion that the managers in question were employed under contracts for services. The second is a letter written by an individual who is qualified to practice as both a chartered accountant and a lawyer, in which she expresses the same opinion. Her letter appears to be simply a reiteration, in essentially the same words, of an opinion letter written by her partner in the accounting firm, and submitted by him to the Revenue Canada officer who made the earlier determination.

[3] I ruled that both of these opinions are inadmissible. As to the first, it amounts to no more than a previous determination by the Minister as to the very issue in this appeal. It is trite that the Minister cannot be estopped from deciding a matter correctly by reason of an earlier incorrect decision.^[4] The letter, however, was not tendered by counsel as the basis of an estoppel, but, he said, simply as a persuasive document which tends to show that the Appellant’s position is to be preferred to that of the Respondent. On that basis it can have no higher claim to admissibility than does the opinion letter of the lawyer/accountant. If it stands on any different footing, it could only be on the basis of their relative degrees of expertise. I appreciate that the “ultimate issue” rule has been substantially eroded over the past several decades.[5] Nevertheless, we have not yet reached the point where so-called expert witnesses may offer opinions as to the very conclusions of fact and law which comprise the whole of the trial judge’s function in the particular matter.[6] That is what both of these letters amount to.

[4] Nor am I persuaded by Mr. Reid’s argument that if I admitted these opinions, I would not be bound to accept them if I did not find them to be persuasive. In the present case, there is no factual issue as to which I could benefit from the assistance of an expert. I am charged with making certain factual findings, on the basis of the evidence presented, as to very ordinary matters. I must then apply domestic law to the facts as I have found them, in order to reach a conclusion. These are exclusively core judicial functions as to which no opinion evidence is admissible.

[5] The Appellant company has some 121 stores. Some of them are in buildings it owns, and it leases others. About 10 of these are what are known as dollar stores. The others are convenience stores, which sell a variety of food and dairy products, and other sundry items. Many of these also sell a selection of the low priced items which make up the stock of the dollar stores. Typically, they are open from early morning until late at night, seven days a week. Some are open 24 hours a day. Each store is run by a manager, assisted by one or two part-time staff. Seldom are two people working in a store at the same time, except when stock is being delivered.

[6] The present appeals arise out of a request made by Darlene Hatter, a former manager, for a ruling as to whether or not her employment was insurable employment under the Act, and employment as to which contributions were payable under the Plan. The initial ruling, made by an officer of Revenue Canada, was that it was not. Ms. Hatter requested a determination by the Appeals Division of Revenue Canada, which found her to have been employed under a contract of service, with the result that both the Act and the Plan applied to her employment. It is from that decision that the employer appeals to this Court.

[7] Counsel for the employer put great emphasis on the system of remuneration of the store managers, and on what he sought to characterize as their high degree of autonomy in the operation of their stores. The terms of their employment, or at least some of them, are to be found in three documents entitled “Financial Arrangements”, “Obligations of the Manager” and “Obligations of the Company”. The company require all new managers to sign these documents upon their appointment. I shall summarize their most important provisions.

[8] Upon their appointment, managers are required to post a cash deposit of $5,000, or in the case of stores grossing more than $1,000,000 per year, $10,000. This is held by the company against the possibility of losses. In practice, the deposit is often paid by instalments withheld by the company from the manager’s remuneration. All sales each day are entered through the cash register in the store, and at the end of each day the manager deposits the receipts in the company’s bank account, and faxes a summary of the day’s sales to the company’s accounting department at the head office, located in Jordan Station. The accounting department prepares financial statements monthly, and at year end. Each store is a separate profit centre for accounting purposes. Against its receipts for the period there are charged the cost of the goods delivered by the company to the store, the cost of telephone and utilities, the payroll cost for the store’s employees, and certain other minor items which are paid for each store by the head office. There is also a charge against each store for what is referred to as “overhead”. This is a percentage of gross sales which is agreed upon with each store manager, and represents the company’s share of the profit from that store. The balance of the profit, determined after inventory is taken at year end, is the manager’s remuneration for the year. Throughout the year, managers receive a monthly draw, usually $1,500, against their share of the profit from their store, as determined at the year end by the accounting department. The balance is paid to them after the year-end determination has been made.

[9] The Financial Arrangements document, relying on the earlier ruling by Revenue Canada, states that the managers “are classified as self-employed by Revenue Canada” and therefore are not subject to deductions for unemployment insurance or Canada Pension Plan. They are, however, considered to be responsible to collect Goods and Services Tax (GST) from Avondale Stores Limited (Avondale) on the amounts that they are paid for their managerial services, and to remit it to Revenue Canada. The document places on them the responsibility to register for GST, and to make the required remittances. Avondale includes the required GST in the managers’ monthly cheques, and presumably in their year-end cheques as well. It also prepares, for the managers, the invoices which they provide to Avondale each month for their services.

[10] The managers’ duties include hiring, supervising and scheduling the staff for the store. They must keep the wage cost at, or below, 9% of net sales. They forward a record of the employee hours to the accounting department bi-weekly, where the payroll function is carried out. The managers order stock for the store from the Avondale warehouse at Jordan Station, selecting from a listing of the various products available. The selling price of the products is specified by Avondale. The managers have some discretion as to the hours that the stores will be open, but they are required to be open seven days per week. They are, of course, responsible for safeguarding the cash and the inventory, and for such things as cleanliness of their stores and the conduct of the employees who work there. The document “Obligations of the Manager” includes the following paragraph:

If the store manager fails to comply with the policies established by the Company, the manager then agrees to submit a letter of resignation to the Company. The Company will arrange for an inventory to be taken at a mutually agreed upon date, and a new manager selected by the Company will assume management at that time.

[11] The company’s responsibilities are to provide the store and the necessary fixtures and equipment, including an Avondale sign, to pay the rent, taxes and insurance, and to provide the inventory necessary to operate the store. It provides the accounting function for the stores and processes the payroll. Bills for each store are paid by the company, and charged to the store, as are the GST and provincial sales tax. It also arranges and pays for advertising, and carries out a centralized purchasing and warehousing function. The document “Obligations of the Company” ends with the following:

Avondale Stores Limited will ... offer advice and guidance.

[12] Much of the evidence was directed to the issue whether the company’s managers offer advice and guidance, or whether they enforce the company’s policies as a supervisor would. Mr. Ralph Patterson, comptroller of Avondale, gave evidence as to the structure of the company and the manner of its operations. He explained the financial arrangements with the managers, and the way in which the company does its purchasing and distribution to the stores. As to the company’s benefit plan, he testified that there is a group plan to provide health care, life insurance and other benefits for the head office employees, which I understood to be paid for, or at least subsidized, by the company. For the store managers there is a range of benefits available, from which they choose the ones that they wish to have. The cost of these is paid for by the company, but charged against the manager’s store, so that the cost is in effect paid by the manager in the form of reduced profits.

[13] He also explained that the mark-up on the products sold through the stores averages about 20%. From this comes the direct charges against each store, and the negotiated percentage which Avondale charges to the store for overhead. This is usually 9¼%, but in some cases is as low as 6% to 8%, depending on the negotiating power of the store manager. What remains is the store’s “profit” which becomes the income of the manager at year end.

[14] Managers are required to complete the basic accounting documents on a regular basis. Each day a cash sheet is completed and faxed to the accounting department at Jordan Station. The hours of the employees are recorded and faxed to Jordan Station for payroll purposes. Most bills for such things as rent, maintenance and repairs are sent directly by suppliers to Jordan Station. A few bills go directly to the store managers, such as those for the few suppliers of goods, such as specialty bread, which the managers are allowed to purchase from suppliers other than the Avondale warehouse. These are not paid by the store manager, but are sent to Jordan Station for payment by the head office accounting department. Tobacco products are ordered by store managers directly from the supplier, with whom Avondale has a contract. The supplier delivers the product to the stores, along with an invoice, which the store manager approves and forwards to the accounting department for payment. Each month the head office produces a summary statement of profit and loss for each store which is sent to the store manager. If there are discrepancies, these are discussed between the manager of the store and the area representative. Inventory is taken at least twice per year, to ensure an accurate year-end profit and loss statement. The area representative is usually present in the store during the inventory process, which is carried out by an outside firm specializing in that work.

[15] Ms. Arlene Kostyk described herself as an area supervisor for the Appellant company. She is one of five such supervisors, and looks after 23 stores. Her title in the hierarchy was sometimes referred to in her evidence, and in that of Mr. Patterson, as area representative, but they both also used the word supervisor on a number of occasions. She described her role as being that of an advisor or helper to the store managers. She stated that she has no authority to overrule a manager as to the hiring and firing of the help in the stores, and no involvement in the decision as to the ordering of inventory by managers. As to pricing, she said that the company wants its managers to stick to the suggested retail prices shown in the Avondale price lists, but that occasionally a manager may reduce an item for some reason. In that case, the company wants the manager to display it as a “manager’s special”. The layout of the stores, according to her evidence is up to the managers, although the company might occasionally rearrange part of a store in order to fit in a new product line. She also testified that she spends four days per week visiting the stores for which she is responsible. The frequency of these visits varies, depending on the managers’ need for help. In the case of a new manager, her visits would be more frequent, as much as once or twice per week. It was clear to me from her evidence, and from that of the witnesses Hatter and Infantino, that her work with the new managers included a significant element of on-the-job training.

[16] Ms. Infantino initially worked as a clerk in one of the Avondale stores, worked briefly as a replacement for a manager who was sick for a period of time, and then was made manager of a store in Welland. Her evidence gave a picture of a much more authoritarian relationship between the company and its store managers than that of Mr. Patterson and Ms. Kostyk. She certainly considered that she had little or no discretion as to such things as the store hours, or her own hours of work. She testified that she was limited in hiring help for the store to a maximum of 68 hours per week. When she had 72 hours one week she was told to keep it down to 68 hours. She also testified that she could not fire a helper without approval from her supervisor, and that Ms. Kostyk told her not to rehire a former employee of the company without approval from head office. She said that almost every order that she placed with the Avondale head office was amended to add items that she had not ordered, called drop shipments, and that it was only with difficulty that she was able to get the excess, unordered inventory removed from the store, and her account credited for its cost. On one occasion, such excess stock was removed by one of the head office employees, but he simply entered the store and took what he wanted to take without reference to her.

[17] She was told that she had to sell at the company’s suggested retail price, and that when she wanted to put a display of dollar merchandise on the back wall of the store she was told that she could not do so. She said that the overhead percentage charged to her store by the Appellant’s accounting department was 7%, and that she had no idea how this percentage had been arrived at.

[18] Darlene Hatter also worked first for the Appellant as a part-time store clerk before she became a store manager. She said that when she asked Ms. Kostyk if she could keep her store open 24 hours per day she was told not to. On one occasion she asked Ms. Kostyk if she could buy the cigarettes for her store at Price Club, rather than through the company chosen by Avondale, and was told that she could not. Ms. Kostyk in her evidence explained that it would not have been efficient to do so, but the significance of this evidence, of course, is not whether Ms. Hatter’s idea was a good one or a bad one, but whether she was given the freedom to make the decision for herself. It appears that she was not. She, too, found that she did not have freedom to arrange the store in the way that she wanted. On one occasion, she was away from the store for two or three days, and when she came back she found that the line of dollar goods had been removed from the store by head office personnel without consulting her about it.

[19] These witnesses were not in serious disagreement as to many of the aspects of the operation of the Appellant. The chief area in which their evidence conflicts is as to the degree of control reserved to and exercised by the company, in relation to the day-to-day operation of the stores. My impression of both Mr. Patterson and Ms. Kostyk was that they were well aware that it would assist their employer’s case to show that the store managers are highly autonomous in the way that they run their stores, and they attempted to convey this in their evidence. I believe that they both did so to greater degree than is warranted by the facts.

[20] Ms. Hatter has some stake in the outcome of this litigation, as she is the one who requested the determination which is under appeal. However, I was left with the impression that she was an honest witness who did not try to distort the facts at all. So far as I know, Ms. Infantino has no interest in the outcome; she, too, appeared to be totally forthright in her evidence. In argument, Mr. Reid suggested that I should consider the evidence of Ms. Hatter and Ms. Infantino to be less reliable than that of Mr. Patterson and Ms. Kostyk, because they were both what he called failed managers, and as such they were not able to speak with authority as to the company and its system of operation. I do not accept that submission. The issue before me is not in any way governed by their competence. I am not called upon to decide whether they were good managers or bad. It is a fact that they were both fired[7] by Ms. Kostyk for failure to produce the expected results, but whether or not their firing was justified does not have any bearing on the issues in this appeal. I believe that they were both in a good position to assess the degree of control exercised by the company over its store managers, and that they both gave their evidence without any attempt on their part to colour the facts. Where the evidence on the subject of control is in conflict, I find that of Ms. Infantino and Ms. Hatter to be more reliable than that of Mr. Patterson and Ms. Kostyk.

[21] The approach to be taken in cases of this kind has been thoroughly reviewed by the Federal Court of Appeal in its judgment in the Wiebe Door case. The trial judge must conduct a careful review of the evidence as to the circumstances of the employment, bearing in mind the factors referred to by the Federal Court of Appeal in that case, with a view to determining whether in the particular case the worker is a servant or an independent contractor. There is no single easy test that will govern every case. The expressed wishes of the worker and the employer are factors to be considered, but they are not dispositive of the issue.[8] Other significant factors include the degree of control exercised by the employer over the way in which the work is to be done, the ownership of the necessary tools and equipment, the opportunity for both profit and loss by the worker, the degree to which the work and the worker are integrated into the business of the employer, considered from the perspective of the worker rather than from that of the employer, and whether or not the worker is bound to do the work himself, or if he may hire and pay people to help him with it. The Federal Court of Appeal gave specific approval to the following formulation of the issue by Cooke J. in the Market Investigations[9] case:

The observations of Lord Wright, of Denning L.J., and of the judges of the Supreme Court in the U.S.A. suggest that the fundamental test to be applied is this: "Is the person who has engaged himself to perform these services performing them as a person in business on his own account?" If the answer to that question is "yes," then the contract is a contract for services. If the answer is "no" then the contract is a contract of service.

[22] In the present case, all the relevant factors militate in favour of the conclusion that the Appellant’s store managers are employees of the Appellant and not independent contractors. It is stated in the financial documents, signed by the managers when they are hired, that they are considered to be independent contractors rather than employees. I do not take this to be any indication of a desire on their part to be considered as contractors; rather it takes the form of a statement that that is considered by Revenue Canada to be the relationship, and that certain provisions of the contract, such as those dealing with the payment of GST, and the non payment of contributions under the Act and the Plan, are the necessary result of Revenue Canada’s view of the matter.

[23] Counsel for the Appellant put great stress on what he characterized as the independence of the managers in the operation of their stores, and their potential to increase their income by achieving greater profits for their stores. However, my apprehension of the evidence leads me to conclude that the store managers really had very little independence. In virtually every aspect of operations their discretion as managers was circumscribed by rules and directions laid down for them to follow. They had very little decision making power as to the hours of opening, the number of staff they would employ, the goods that they would stock in the store, or even the layout of the store. The advertising, including the designation and pricing of weekly “specials”, was dictated to them by head office personnel. They could obtain a few items of their own choice for sale in the store from suppliers other than those contracted by the Appellant for the whole chain, but these comprised a very small part of the stock. Even the discretion to decide what items to order from the Avondale warehouse, and in what quantities, was considerably eroded by the practice, which was universal, of adding unwanted drop-shipments to virtually every order. Where they did have decision-making power, it was limited to such matters as the selection of store workers, the ordering of stock (subject to the drop-shipments) and other matters which I would expect to be within the discretion of an employee in the position of store manager, even within an authoritarian management regime.

[24] Counsel for the Appellant put a great deal of emphasis on the compensation scheme for managers, which I have described above. His submission was that the managers had the opportunity to enhance their incomes by hard work and efficiency, and that, conversely, those who did not work hard and run their stores efficiently would necessarily earn less. Indeed, if they were bad managers they could find that at the end of their tenure they lost their security deposit because inventory of the store was missing and not accounted for. This, counsel suggested, leads to the conclusion that they have the opportunity for both profit and loss. A number of factors undoubtedly affect the profitability of each Avondale store, and with it the income of the manager. Some, such as the selection of the available product lines and the prices at which they are to be sold, are head office decisions which are outside the control of the manager. Others, such as the turnover of inventory within the store, and the hours of labour employed, are controlled by the manager. Still others, such as the store location and the amount of nearby competition, are fixed. No doubt an efficient manager will earn more than an inefficient one, if all of the other factors are equal. This, however, is not determinative of the nature of the working relationship. There are a great many employees whose incomes vary according to their efforts and their efficiency, from piece workers in factories, to commission salespersons, to chief executives. The fact that they are remunerated on an incentive basis does not make them independent contractors. The compensation scheme which the Appellant has devised for its store managers is simply an incentive plan, similar in principle to many others which apply to company employees.

[25] These store managers must surely consider themselves to be totally integrated into the business of the Appellant. In the course of argument, I asked counsel for the Appellant what, in his submission, is the nature of the business that the store managers are in. His reply was that they are in the business of merchandising someone else’s retail products to consumers at a profit. This, in my view, is illustrative of the fundamental fallacy in the Appellant’s position. The managers have no ownership interest in their stores, or the fixtures, the inventory, or anything else connected with its operation. It is quite clear that they do not have the relationship of employer and employee with the help who work in their stores; this was admitted by counsel, although Mr. Patterson in his evidence, quite wrongly, suggested otherwise. If they are in a business at all, then it would have to be the business of managing someone else’s business for them. However, they have no potential whatsoever to expand their so-called business to serve other owners of convenience stores by providing a management service to them. Running an Avondale store is a full-time job, requiring that the manager be there for about 60 hours per week. If the manager is sick for a few days, then she may find and pay a substitute, but there is no doubt that the company would not permit a manager to sub-contract the job of running the store to someone else, so that she could devote time to managing someone else’s store.

[26] Considering all of the factors which I have discussed above, and applying Cooke J.’s test, I conclude that no reasonably well-informed observer would be likely to think that the managers of the Avondale stores are all running businesses on their own account. Instead, he would think that the business belongs to the Appellant, that the managers work for the Appellant as employees, and that they are remunerated on an incentive plan which is designed to ensure that they work diligently to maximize profits for the company, because by doing so they also maximize their own incomes.

[27] The appeals under the Act and the Plan are dismissed, and the determinations of the Minister are confirmed.

Signed at Ottawa, Canada, this 18th day of December, 1997

"E.A Bowie"

J.T.C.C.

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