Anonymised, illustrative composite. This file is not about whether nineteen people were employees. It is about what changes in an indemnity negotiation once the Act prohibits the treatment itself, and about a repeal that removed the evidentiary teeth without touching the prohibition.
At a glance
The target was a creative studio with 34 people on payroll and 19 engaged through personal corporations on rolling annual agreements worth $1,340,000 a year in aggregate. All 19 worked from the studio's premises, on the studio's equipment, under the studio's creative direction, with studio email addresses. Eleven of them had no other clients.
The buyer raised classification in diligence. The seller's response was that the question was arguable both ways, that no complaint had ever been made, and that the exposure therefore belonged inside the general representation and warranty package — subject to the ordinary indemnity basket, the ordinary cap and the ordinary survival period.
The framing does not survive the structure of the Act. Since 27 November 2017 the Employment Standards Act, 2000 has contained s.5.1(1): “An employer shall not treat, for the purposes of this Act, a person who is an employee of the employer as if the person were not an employee under this Act.”
That is not a re-statement of the underlying entitlements. It is a freestanding prohibition on the treatment, which means the contravention exists independently of whether any particular wage, vacation or holiday entitlement is unpaid, and it can be the subject of enforcement on its own. Under s.113(1), “If an employment standards officer believes that a person has contravened a provision of this Act, the officer may issue a notice to the person setting out the officer's belief and specifying the amount of the penalty for the contravention.” A penalty route that does not depend on quantifying anybody's unpaid wages is not an ordinary wage exposure, and it does not sit naturally inside a basket sized for balance-sheet variance.
What is not true is that the burden of the argument sits on the seller. That was the position for thirteen months and it is not the position now.
If all 19 were reclassified, the ESA layer is modest and calculable: vacation pay at 4% of the $1,340,000 of fees is about $53,600 a year, with public-holiday pay, any overtime above 44 hours a week and record-keeping obligations on top, all of them subject to the same two-year order window that governs every ESA claim. Termination and severance exposure sits outside that arithmetic and depends on individual service.
The larger figures are in other statutes on other tests, and a buyer that prices only the ESA layer will under-reserve. Canada Pension Plan and Employment Insurance treatment is a federal question decided by the Canada Revenue Agency on its own criteria, and it is not bound by an employment standards officer's view or by the Ontario Act. The point for the indemnity is that a single set of facts feeds several regulators with different tests, different limitation periods and different collection powers, which is exactly what a general basket is not built to absorb.
The provision arrived with a companion. As enacted by the Fair Workplaces, Better Jobs Act, 2017, s.5.1(2) read: “if, during the course of an employment standards officer's investigation or inspection or in any proceeding under this Act, other than a prosecution, an employer or alleged employer claims that a person is not an employee, the burden of proof that the person is not an employee lies upon the employer or alleged employer”. The marginal note was Onus of proof.
It lasted thirteen months. The Making Ontario Open for Business Act, 2018 provided, at section 3 of its first Schedule, that “Subsection 5.1 (2) of the Act is repealed.” The repeal took effect on 1 January 2019. The prohibition in s.5.1(1) was left untouched.
The repeal was targeted rather than a change of general approach, and the Act itself shows it: the same reverse-onus device is still in force elsewhere. Section 74(2), on reprisals, provides that subject to s.122(4), “in any proceeding under this Act, the burden of proof that an employer did not contravene a provision set out in this section lies upon the employer”. The legislature kept the device and removed it from one question — the employee-or-not question — which is precisely the question a seller wants to describe as arguable.
So the correct reading for a negotiation is narrow and specific. The treatment is still prohibited. What changed in 2019 is who has to prove what, and that change makes the seller's “arguable” position materially cheaper to hold than it was when the provision was drafted. A buyer that accepts the framing is accepting the benefit of a repeal that ran in the seller's favour.
The classification exposure came out of the general package into a specific indemnity: no basket, a separate cap set at the aggregate of two years of fees, and a survival period running to the outside of the relevant assessment and complaint periods rather than to the general 18 months. The buyer also converted 11 of the 19 to employment at closing on terms that priced the vacation and holiday entitlements openly, and let the remaining 8 — who had other clients, their own equipment and their own premises — continue as they were.
The conversion cost about $96,000 a year in employer-side entitlements and removed the part of the exposure that was continuing to accrue. Compare contractors who were employees in all but name, where the substantive classification test is the subject; here the test is assumed and the file turns on the prohibition and the repeal.
Inside a general basket, a $210,000 classification finding on a $4,900,000 deal would very likely have been absorbed entirely — which is the outcome the seller's framing was designed to reach, whether or not anybody said so. The specific indemnity cost the seller nothing at signing and everything at the point of a finding, which is the correct allocation for a risk the buyer cannot diligence away and the seller created.
The tell was in the contractor agreements themselves, and it was a drafting habit rather than a fact: nineteen agreements on one template, all renewing annually, all naming the studio's own creative director as the person to whom the contractor reported. A genuine contractor file is heterogeneous, because genuinely independent people bring their own paper.
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