Friday 30 May 2014

Whether an equity partner in a law firm is an employee within meaning of Human Rights Code?

Supreme Court of Canada: Where a question arose as to whether an equity partner in a law firm is an employee within the meaning of the Human Rights Code, R.S.B.C. 1996, c. 210 (in short “the Code”), the Court held that the test of determining the control/dependency of the worker with the employer so as to examine the “employment relationship” under the Code. The brief facts of the case are that the petitioner became an equity partner at his law firm. He had ownership interest in the firm. The equity partners voted to include a provision in their Partnership Agreement that required equity partners to retire as equity partners and divest their ownership shares at the end of the year in which they turned 65. A partner could make arrangements to continue working as an employee or as regular partner without an equity stake. Such arrangements were exceptions rather than a rule. When the petitioner was 64, he filed a complaint to the Human Rights Tribunal arguing that this provision constituted age discrimination in employment, contrary to Section 13(1) of the Code. The Tribunal concluded that there was an employment relationship. 

Holding, that the Tribunal had no jurisdiction over the petitioner's relationship with the partnership, the Court said that “employment relationship” under the code means examining how two synergic aspects function in an employment relationship i.e. the control exercised by an employer over working conditions, remuneration and dependency of the worker. The test is, who is responsible for determining the working conditions, financial benefits and the extent to which a worker has a say in that? Applying this control/dependency test in addition to the right to participate in the management of the partnership, as an equity member, the petitioner benefited from other control mechanisms, including right to vote for and to stand for election in the firm's board. As an equity partner and based on his ownership, sharing profits/losses and the right to participate in management, he was a part of the group that controlled the partnership and was not under its control. For 30 years, he benefited financially from the other partners retirement and he was not in a subordinate relationship with other equity partners. He was subject to administrative rules, however, that did not change the relationship into one of subordination. This is not to say that a partner can never be an employee under the Code, but in absence of any genuine control of the petitioner in the decisions affecting the workplace, there is no employment relationship in this case.
[McCormick v. Faken Martineau DuMoulin; LLP, 2014 SCC 39; decided on 22 May, 2014]

The Supreme Court's unanimous decision of May 22, 2014 in McCormick v. Fasken Martineau DuMoulin LLP1 determined that an equity partner in a large national law firm was not an employee under British Columbia's human rights legislation. His complaint of age discrimination in employment when he was retired by the firm at 65 under its mandatory retirement policy was dismissed because no employment relationship existed between him and the firm in which he was a partner.
For any business operating as a partnership, especially large professional firms, the Court's decision that even a liberal interpretation of the definition of "employment" in the British Columbia Human Rights Code2 could not make Mr. McCormick an "employee" on the facts of his case will be of primary interest. But the Court's discussion of the tests for determining whether a person is an employee is of importance to all employers, as is the Court's emphasis that the substance of the relationship, not its legal form, must govern.
In finding that Mr. McCormick was not an employee for the purposes of the Human Rights Code, the Supreme Court's reasoning differed from that of the British Columbia Court of Appeal. That court had held that Mr. McCormick's status as a partner was sufficient of itself to defeat his claim. For the Supreme Court, the key considerations were the degree of control a putative employer exercises over the person claiming to be an employee and the degree to which the "employee" is dependant on the "employer"; the legal form of the parties' relationship is not determinative. Instead, a court must examine the "substance of the actual relationship and the extent to which control and dependancy played a role."3
In Mr. McCormick's case, the Supreme Court found that his rights under the partnership agreement, and his partners' duties towards him and under the agreement and under the law of partnership, meant that he was engaged "in a common enterprise with his partners for profit and was therefore working for his own benefit", and not for the benefit of a separate entity as in the case of an employee. The Court held that, in essence, "[f]ar from being subject to the control of Fasken, Mr. McCormick was among the partners who controlled it."4 Therefore, he was not an "employee" for the purposes of theHuman Rights Code.5
The key facts leading the Supreme Court to this conclusion were that:
  • as an equity partner in the firm, Mr. McCormick had a right to vote in the election of members of its governing bodies, to be elected to them and to vote on the adoption of firm policies, including, of course, the one requiring equity partners to retire at 65;
  • his remuneration was determined by a committee of his fellow partners using criteria designed to measure his contribution to the firm;
  • his remuneration came from the firm's profits;
  • he had capital in the firm and was entitled to have it repaid to him on leaving the firm;
  • while he had to follow administrative rules established by the partnership and its governing bodies this did not mean he was subject to control by the partnership, because as a partner he had the right to participate in making those rules; and
  • his membership in the firm could only be ended prior to mandatory retirement by a vote by the partners to expel him, a vote subject to a high procedural threshold.
The Court relied as well on the duty partners have to deal with each other with the utmost good faith, both at common law and under the British Columbia Partnership Act6, and their duty as partners to render accounts to each other. This duty of good faith, the Court held, "may well capture some forms of discrimination among partners that represent arbitrary disadvantage."7
Consistent with its caution that the status of being a partner does not automatically preclude a person from being considered an employee for the purposes of the Human Rights Code, though, the Supreme Court noted that this could be the case if the "powers, rights and protections associated with a partnership were greatly diminished" under a partnership agreement for certain partners.8 For firms distinguishing between equity and non-equity partners, and which have different levels of participation in the governance of the firm depending on a partner's status, this is an important qualification. This caution by the Court could well be a source of future litigation between firms and partners whose rights to control the firm are more limited than those enjoyed by the equity partners of firm
The second major aspect of the Supreme Court's decision in McCormick is the discussion and approval of a broadly stated test for determining who is an employee. Though stated with reference to the specific provisions of British Columbia's human rights legislation, the test can be expected to be applied under other human rights legislation and influence common law determinations of employee status. While not disapproving of the more elaborate lists of factors found in case law under human rights and labour relations legislation, the Supreme Court in McCormick treated them as simply alternate ways of stating its own two-part test. This test asks: "who is responsible for determining working conditions and financial benefits and to what extent does the worker have an influential say in those determinations?"9The degree to which a person is, in fact, subject to someone else's power to decide on working conditions and remuneration, and the resulting dependancy, will determine whether or not the person is an employee. The Court describes these themes of control and dependency as the "consistent animating" themes of legislation aimed at protection of employees in Canada and internationally.10
What effect this restatement of the test for employee status will have, at least where protection of the potential employee is the legal issue, will be of interest all Canadian employers. The broadly stated nature of the test, along with the Court's emphasis on not using longer lists of factors in a "formulaic" manner and on seeking the substance of the relationship between the parties, may well result in litigation as lower courts consider whether the revised test will make someone an employee who might not otherwise have been.

1 2014 SCC 39
2 R.S.B.C.1996. c. 210
3 Paras 23-29,38.
4 Para. 46.
5 Para 42.
6 R.S.B.C. 1996, c. 348.
7 Para 48.
8 Para. 46.
9 Para. 23.
10 Paras. 25-28.
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