This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
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Understand the Difference Between an Employee and an Independent Contractor in Canada
When hiring workers, businesses in Canada often face the question of whether to classify an individual as an employee or an independent contractor. The distinction between these two types of workers is important for both legal and financial reasons, as it affects issues such as tax obligations, employment benefits, and legal responsibilities. Misclassifying a worker can result in significant financial and legal consequences for employers, so it is essential to understand the key differences between employees and independent contractors in Canada.
In this article, we will explore the key distinctions between employees and independent contractors, including their rights and obligations under Canadian law, as well as the factors that influence the classification.
- Definition of an Employee vs. Independent Contractor
Employee:
An employee is a person who works for an employer under a contract of employment. The employee is typically subject to the control and direction of the employer regarding how, when, and where the work is performed. Employees are entitled to various statutory rights and benefits under Canadian labour laws, including minimum wage, overtime pay, vacation pay, and other employment-related benefits.
Independent Contractor:
An independent contractor, on the other hand, is a self-employed individual who provides services to a business under a contract for services. Unlike employees, independent contractors are not subject to the same degree of control by the hiring business. They typically work for multiple clients, set their own hours, and are responsible for their own tools, taxes, and business expenses. Independent contractors are considered separate businesses or entities, and they do not have the same rights or benefits as employees.
- Key Differences Between an Employee and an Independent Contractor
The primary difference between an employee and an independent contractor lies in the nature of the working relationship. The following factors help determine whether a worker should be classified as an employee or an independent contractor:
A. Control
• Employee: An employer has a high level of control over how, when, and where the work is performed. The employer may set specific work hours, assign tasks, and dictate the method of completing the work.
• Independent Contractor: An independent contractor generally has more control over how the work is performed. They decide when and where to work and how to complete tasks, as long as the work meets the client’s expectations.
B. Ownership of Tools and Equipment
• Employee: Employees typically use the employer’s tools, equipment, and office space to perform their duties. Employers are responsible for providing and maintaining the necessary tools for work.
• Independent Contractor: Independent contractors usually supply their own tools, equipment, and workspace. They are responsible for all costs associated with the work, including the purchase and maintenance of any tools and equipment.
C. Financial Risk
• Employee: Employees typically receive a regular salary or hourly wage, regardless of the business’s financial performance. They do not bear any financial risk associated with the work.
• Independent Contractor: Independent contractors assume financial risk in the sense that they are typically paid on a per-project basis or by invoice. They may experience fluctuations in income based on the volume of work they complete, and they bear the risk of non-payment by clients.
D. Integration into the Business
• Employee: Employees are usually considered an integral part of the business. They work exclusively for the employer and are integrated into the day-to-day operations.
• Independent Contractor: Independent contractors are usually not integrated into the employer’s operations. They provide specialized services for a set period or project but do not become part of the core operations of the business.
E. Duration of the Relationship
• Employee: The relationship between an employee and employer is typically ongoing, unless the employee leaves or is terminated. It is often based on a long-term commitment or a permanent role.
• Independent Contractor: Independent contractors are often hired for specific projects or fixed periods. Their relationship with the business is usually temporary, and they may work for multiple clients simultaneously.
- Legal and Tax Implications
A. Taxation
The tax treatment of employees and independent contractors is significantly different in Canada.
• Employee: Employees have income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums automatically deducted from their pay by their employer. Employers are also responsible for making employer contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI).
• Independent Contractor: Independent contractors are responsible for paying their own taxes, including income tax, CPP contributions, and EI premiums (though they are generally not eligible for EI benefits unless they meet specific requirements). Independent contractors must file their own tax returns and are required to remit their own GST/HST if their annual income exceeds the threshold for mandatory registration.
B. Employment Benefits and Protections
Employees in Canada are entitled to various legal benefits and protections under federal and provincial labour laws, including:
• Employment Standards: Minimum wage, overtime pay, paid vacation, statutory holidays, and sick leave.
• Workplace Safety: Protection under Occupational Health and Safety legislation and compensation for workplace injuries through Workers’ Compensation programs.
• Employment Insurance (EI): Eligibility for unemployment benefits and maternity/parental leave.
• Termination Rights: Protection from unjust dismissal and entitlement to severance pay under the Ontario Employment Standards Act (ESA).
In contrast, independent contractors do not receive these benefits and protections. They are not covered by employment standards legislation and are not entitled to the same statutory protections as employees. Independent contractors must negotiate their own terms of employment, including payment, deadlines, and any applicable benefits.
- Factors Influencing Classification
The Canada Revenue Agency (CRA) uses several key factors to determine whether a worker is an employee or an independent contractor, including the degree of control, the level of responsibility for expenses, the nature of the work relationship, and whether the work is integrated into the business.
Some of the key questions the CRA asks include:
• Does the worker work exclusively for the business?
• Does the worker set their own schedule and location for completing the work?
• Does the worker invest in their own tools and equipment?
• Is the worker required to follow specific instructions or use prescribed methods to complete their work?
The CRA assesses these and other factors when determining the correct classification, and businesses are encouraged to review their relationships with workers to ensure proper classification.
- Consequences of Misclassification
Misclassifying a worker as an independent contractor instead of an employee can have significant legal and financial consequences. If the CRA determines that an independent contractor should have been classified as an employee, the employer may be liable for back taxes, CPP contributions, and EI premiums. In addition, misclassified workers may be entitled to retroactive employment benefits, such as vacation pay and severance.
Businesses should carefully assess the nature of their relationship with workers and consult legal or tax professionals to ensure compliance with Canadian tax and labour laws.
- Conclusion
The distinction between an employee and an independent contractor is crucial for Canadian businesses, as it affects various legal, financial, and tax obligations. Employees benefit from a range of statutory rights and protections, while independent contractors maintain more flexibility but assume responsibility for their own taxes, expenses, and benefits.
To avoid potential legal and financial pitfalls, businesses in Ontario and across Canada must carefully assess the nature of their working relationships with individuals and classify them correctly based on the level of control, the nature of the work, and other relevant factors.
If you’re unsure about whether a worker should be classified as an employee or an independent contractor, it’s always a good idea to seek legal advice to ensure compliance with the Canada Revenue Agency (CRA) guidelines and Employment Standards Act.
Sources:
Government of Canada. “Employee or Self-employed”
Government of Canada0. “Employers’ Guide – Payroll Deductions and Remittances”
Employment Standards Act (Ontario), RSO 1990, c E.14.