Handshake Business Agreement Not Enough In Court feature image

Handshake Business Agreement Not Enough In Court

One of the advantages to owning a small business is the ability to be nimble and make your business work in a wide range of scenarios. This can also include doing things a little more informally than a larger business can do. However, as demonstrated in a recent decision from the Ontario Superior Court of Justice, informal business practices can sometimes come back to haunt you.

Background

The case involved two marketing companies (“VPM” and “BAMS”). VPM was established in 1991, with its only directors being a husband and wife team. VPM acted as a media buying company and had a few clients with substantial marketing budgets. In 1992 VPM started to partner with another marketing firm, BAMS. BAMS was also a small operation, with one person being the main contributor to work. After the informal partnership began, the husband and wife behind BAMS started to earn all of their money from contracts obtained by VPM. BAMS was eventually incorporated in 2006, but the business relationship was still not formalized.

Both VPM and BAMS operated separate offices out of their homes, paying their own bills, and filing their own taxes. Despite the work behind done under the VPM name (and with VPM business cards and email addresses), the couple behind BAMS were never given T4s for tax purposes.

The arrangement called for commissions to be split with 55% going to VPM and 45% going to BAMS. The arrangement was lucrative, with BAMS earning $300,000 annually towards the end of the relationship.

Despite the informal nature of their partnership, it was well known amongst their customers that the parties involved worked closely together, combining strengths and offering excellent service to their clients.

Death of a founder

In 2010, the husband behind the team that started VPM died unexpectedly. As a result, his wife became the sole shareholder, director, and officer of VPM. She met with the couple behind BAMS and they agreed to continue their partnership for one year. This required the BAMS team to do a little more work than under the previous structure. VPM had little face-to-face time with clients, with the BAMS team handling much of the marketing work. VPM paid the BAMS team a $10,000 bonus in Christmas 2010 in addition to 45% of the revenue.

Despite the BAMS team working harder, the parties did not discuss altering the share of profits each company received.

Things go south

While 2010 was a smooth year for the businesses, 2011 did not follow suit. The relationship between VPM and BAMS began to deteriorate by May 2011, leading to BAMS terminating its relationship with VPM in August of that year. In the months leading to the breakup, BAMS had tried to convince the owner of VPM to provide funding for them to hire someone else to help with the business. Additionally, BAMS offered the owner of VPM $48,000 to retire. This offer was not accepted.

Following the breakup, virtually every client began working with BAMS rather than continuing with VPM.

Was BAMS a dependent contractor?

After learning of the steps that BAMS had taken to secure the clients previously shared by the companies (including BAMS re-naming themselves to include “marketing” in their title, and directing clients to correspond directly with BAMS), VPM brought a claim against BAMS arguing that its owners breached their fiduciary duties as either employees or dependent contractors by redirecting business from VPM to BAMS.

The court turned to a 2009 decision, which is the leading case on determining contractor status. In the case, the Ontario Court of Appeal held that a dependent contractor is someone who works exclusively (or almost exclusively) over an extended period of time with a single client. After looking at the relationship between BAMS and VPM, it was held that the former was a dependent contractor of the later after working exclusively with them from 1992 to 2010, with all of BAMS’ income coming from VPM.

The court ordered BAMS to pay VPM $614,0624 in compensatory damages based on how much income BAMS’ actions cost the owner of VPM over four years. The court also awarded VPM $30,000 in punitive damages.

Drafting and negotiating contracts and policies may not be the most exciting part about starting or operating a business, but as the owners of BAMS learned, it’s a critical step to protecting one’s self in the event that things don’t go as smoothly as planned in the future. At HMC Lawyers, our skilled employment team works with employers to draft, review or negotiate the terms of employment contracts and workplace policies. Call us at 403.269.7220 or reach us online to see how we can help you manage the health of your business today.

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