The Appeal CommissionThe Workers Compensation Act of Manitoba

Preamble

An Appeal Panel hearing was held on October 19, 2004, at the employer's request. The Panel discussed this appeal on October 19, 2004 and again on March 14, 2005.

Issue

Whether or not the WCB should consider deemed workers based on the 2000 audit as partners under the partnership of the firm of record;

Whether or not the WCB should consider deemed workers based on the 2001 audit as partners under the partnership of the firm of record;

Whether or not the WCB should consider deemed workers based on the 2002 audit as partners under the partnership of the firm of record; and

Whether or not the firm of record should be considered a worker of any general contractor engaging their services, effective January 1, 2003.

Decision

That the WCB should not consider deemed workers based on the 2000 audit as partners under the partnership of the firm of record;

That the WCB should not consider deemed workers based on the 2001 audit as partners under the partnership of the firm of record;

That the WCB should not consider deemed workers based on the 2002 audit as partners under the partnership of the firm of record; and

That the firm of record should be considered a worker of any general contractor engaging their services, effective January 1, 2003.

Decision: Unanimous

Background

On November 28, 2001, an auditor with the Employer Services division of the Workers Compensation Board (WCB) advised a commercial framing operation (CFO) of the results of an audit that he carried out with respect to its 1999 and 2000 workers' earnings. The auditor's findings showed that the CFO correctly reported its assessable earnings for 1999 and that it underreported the assessable earnings for the year 2000. The letter also stated, in part, that the 2000 underreporting occurred because the firm did not include the earnings of individuals or firms working on a contract basis.

In a follow up letter dated December 13, 2002, the WCB auditor stated, in part, "Because we have determined that individuals who signed "Schedule C to a Partnership Agreement" after January 1, 2000 are workers and not partners of [firm's name], my 2000 audit result stands. This ruling will also apply to 2001 and 2002 as well."

The WCB also conducted a "Claims Verification" of the firm as a result of a workplace injury suffered by an individual, who had originally been considered to be a partner of the firm. On May 7, 2003, the WCB stated that:

"A total of one claim was verified in 2001. This claimant was a contractor who was previously considered a deemed worker of [the firm]. Accordingly, his earnings have been assessed. This same individual required an appeal of their claim in order to receive benefits, as the firm made previous representation that he was a partner."

In a letter dated May 22, 2003, the WCB advised the CFO of the results of a 2001 and 2002 earnings audit that took place on May 7, 2003. The audit confirmed that the firm had underreported its assessable earnings for both years.

On May 4, 2004, the Assessment Committee reviewed an appeal submission from the firm's lawyer dated February 10, 2004 along with all file documents starting from 1991.

Based on the definition of "employer" as outlined under The Workers Compensation Act (the Act) along with subsection 60(2.1) of the Act, the Assessment Committee agreed with the auditor's decisions not to consider deemed workers from the 2000, 2001 and 2002 audits as partners under the partnership of the firm. The Committee also agreed with the auditor to consider the firm a worker of any general contractor engaging their services effective January 1, 2003 based on the criteria outlined in subsection 60(2.1) of the Act.

On June 14, 2004, the firm's lawyer submitted an "Appeal of Assessment Decision" form to the Appeal Commission requesting an oral hearing in light of the Assessment Committee's decision. On October 19, 2004 an Appeal Panel hearing was held.

Following the hearing and after discussion of the case, the Appeal Panel requested the following information be obtained prior to discussing the case further:

• " That legal counsel for the firm submit to the Appeal Panel a written summary (dates and names) of all the workers who signed "Schedule C" forms in 1999, 2000, 2001 and 2002. Also, to attach a copy of each "Schedule C" signed form with the written summary.
• " That the firm's accountant provide the Appeal Panel with a summary of all payments made to a particular partner in 2000 and 2001 along with pertinent information as to what projects/contracts each payment was made.
• " That the Employer Services Division of the WCB provide the Appeal Commission with all information concerning an "industry audit" that was carried out sometime between 1999 and 2000.

On March 14, 2005, the Panel met further to discuss the case and considered the new information that was requested and provided by legal counsel on the firm's behalf and from the WCB's Employer Services Division dated October 28, 2004.

Reasons

The evidence discloses that the CFO established a partnership in the late 1980s, with an original list of eight partners. In the next couple years, partners were added to or deleted from the partnership. Documentation was completed to record these changes. A 1991 audit by the WCB examined the CFO and accepted its partnership arrangement, which allowed the various individuals involved to be considered as self-employed individuals with respect to WCB coverage, and thus not required to pay premiums for workers compensation coverage. These individuals would not, of course, be entitled to receive benefits in the event of an injury, unless they chose to apply for voluntary coverage.

As stated in the background notes, the WCB audited the CFO again for the years 1999 and 2000. The WCB auditor at that time reviewed the firm's legal and accounting records and, as well, the business practices of the CFO. He concluded that the individuals involved in the CFO should be considered as "deemed workers" of the CFO under the WCB's Independent Contractors Policy 35.10.50, rather than as self-employed individuals operating under a partnership arrangement. The effect of this decision had the impact of having the firm now being responsible for payment of workers compensation premiums on the "deemed workers" behalf. This decision was upheld by the WCB Assessment Committee and is the subject of this appeal.

In light of the decisions reached by the WCB and the submissions prepared by legal counsel on behalf of the CFO, we note that there are two competing legal principles in play in this case. The first legal tenet is the right of individuals to structure their affairs in a manner most advantageous to them. This is well-established in business law, where individuals have the options of operating as a self-employed unincorporated business, as a partnership, or as an incorporated company. There are a variety of tax and liability implications associated with each option and individuals have a broad right to select the vehicle most appropriate to their needs.

Countering this premise is section 14 of the Act which constrains the general principle stated above.

S.14 - Contracting out of Act forbidden
It is not competent for a worker to agree with his employer to waive or forego any of the benefits to which he or his dependants are or may become entitled under this Part; and every agreement to that end is void.

Under the provisions of the Act, the Appeal Commission is charged with the responsibility to consider each case on its real merits and justice. After careful consideration of all the materials on the file, as well as the evidence and submissions tendered at and subsequent to the hearing, we have concluded that the decisions made by the WCB Assessment Committee are correct. The evidence supports our finding that the individuals identified in the 2000 - 2002 audits should, on a balance of probabilities, be considered deemed workers, and that the firm of record (CFO) should be considered a worker of any general contractor engaging their services, effective January 1, 2003.

In reaching these conclusions, we have placed considerable weight on the following body of evidence:

• While the CFO originally was established as a partnership in the late 1980s, it allowed its partnership registration to lapse in 1994 due to non-filing.
  
  
• Many individuals entered and left the CFO throughout the 1990s, and 2000-2002, and had done framing work with this entity. However, there never was a maintaining of an up-to-date partnership agreement throughout these periods. Alleged partners came and went without any formal documentation to support their status as partners. During these periods, many of these individuals did not sign the "Schedule C" documents at the time of their entry into the partnership. Nor were they afforded the opportunity to review the partnership agreement or to seek legal advice regarding the implications of their entering into such an agreement. The evidence adduced at the hearing (transcript, pages 91 and on) disclosed that many of these individuals worked with the firm for varying periods of time as a sub-contractor before being asked to join the partnership and some individuals were considered as partners based on verbal commitments as well as being included in the financial statements before their signing of the partnership agreement.
  
  
• During these periods, the CFO did not keep the WCB informed as to changes in the composition of its partnership.
  
  
• It appears that the CFO and its legal counsel initiated an updating of the Schedule "C" forms and the re-registration of the partnership in the Corporations Branch in direct response to the WCB's audit process, and not in the normal course of business.
  
  
• The CFO operated without partnership equity accounts, which are a usual feature of partnerships.
  
  
• The individuals were not paid draws from the partnership accounts. We accept the findings of the WCB auditor who comments on October 24, 2001 that "12 individuals who signed Schedule C partnership amended agreements in 2000 received payments from [the firm] through either piecework or subcontractor expense accounts. These accounts make up the firm's direct costs as shown in the 1999 statement of income. They did not receive any monies through their partner equity account."
  
  
• The partnership's success as an enterprise was not a factor in how the individuals were paid. Instead, the partnership agreement stipulated that the individuals, when paid, were done so on a fixed hourly rate schedule in accordance with their skill levels as determined by the various individuals involved in the partnership.
  
  
• The individuals were paid when they worked, and did not receive any payments (of profits or otherwise) if they did not work. The net effect of this arrangement was that the partnership had nominal assets and a nominal profit/loss position each year, once all individuals had been paid their hourly entitlements.
  
  
• The managing partner was the brother of a general construction contractor (CC). According to the evidence at the hearing, the CC arranged for 85% of the CFO's work each year and tendered on various framing contracts on behalf of the CFO. Once accepted, the managing partner would contact the individuals associated with the CFO to fulfill the work required on the successful tenders. These individuals were later paid at their individually recognized hourly rates. The individuals had the right to accept or decline the work based on their being otherwise employed or engaged.
  
  
• We were also struck by the varying levels of understanding of the business arrangements amongst the alleged partners. As outlined in the background notes, one of the "partners" hurt himself at work and filed a WCB claim. In reviewing his claim file, this individual at various times stated his belief that he was a partner, that there was a partnership equity account (when in fact there wasn't) and that at other times he was a worker paid on piece work basis.

Although the CFO group considers itself to be a partnership comprised of self-employed individuals, we find on a balance of probabilities that the CFO's various arrangements confirm otherwise. More specifically, we consider these various individuals to be more like casual workers than a partnership of self-employed individuals. In reviewing the CFO enterprise as a whole and its relationship with the CC, we do not see a compelling business purpose that would allow it to stand alone and that would warrant the establishment of all of its partners as self-employed individuals under WCB Policy 35.10.50. Based on the weight of evidence, as well as the nature of the documentation (including the lack thereof), we find on a balance of probabilities that the CFO's arrangements amount to an improper contracting out of benefits, as defined in Section 14 of the Act, and that these individuals should be deemed as workers under the Act.

We further conclude that the WCB acted appropriately in considering the individuals involved with the CFO to be deemed workers under the Act in 2000-2002, and for the same reasons we conclude that the CFO should be considered to be a worker of any general contractor engaging its services, effective January 1, 2003, should the CFO choose not to pay assessments for its deemed workers.

Panel Members

R. W. MacNeil, Presiding Officer
A. Finkel, Commissioner
M. Day, Commissioner

Recording Secretary, B. Miller

R.W. MacNeil - Presiding Officer
(on behalf of the panel)

Signed at Winnipeg this 14th day of April, 2005