What is the difference between an employee and an independent contractor, and why does it matter?
In employment law, the determination of employee or contractor status determines which laws protect and govern the worker in question. Therefore, this determination of status is crucial.
If a person is an employee, s/he:
- is afforded employment protection under both the common law and employment legislation, which covers things like minimum wage, holidays, overtime, termination, and notice
- (if applicable) is covered by workers’ compensation legislation without having to pay premiums himself/herself
- generally has an exclusive, and sometimes long-term, relationship with the payer
- will have income tax, Canada Pension Plan, and Employment Insurance payments deducted from his/her pay cheque and remitted on his/her behalf (rather than having to remit them himself/herself)
- may have employer-paid benefits such as health care, sick leave, pension plan, professional development, parking, and gym membership
- cannot claim tax benefits, for example, deductions for work-related expenses
If a person is a contractor, s/he:
- is considered self-employed and therefore is not covered by most employment protection under both the common law and employment legislation
- may have to arrange and pay for his/her own work-related accident compensation
- is free to provide his/her services to other organizations
- does not have statutory deductions applied to his/her pay and must provide his/her own tax, Canada Pension Plan, and Employment Insurance payments to the government, as well as paying for his/her own additional benefit
- can claim most reasonable business expenses as deductions on his/her yearly income tax returns
I have a person doing some work for me, but I do not want him to be considered an employee. I signed a contract that says he is an independent contractor. Doesn’t that mean that he is?
No. Written contracts are useful as a guide in determining whether you have an employer/employee or payer/contractor relationship. However, the essence of the relationship is the determining factor, regardless of what appears in the contract.
Just because a person is labeled an independent contractor does not mean that s/he is one. In order to be an independent contractor, the person must meet the criteria that have been developed at common law.
How can I know if I am (or my worker is) an employee or an independent contractor? What are the common law tests?
Common law tests developed by the courts and various tribunals determine who is an employee and who is an independent contractor.
In general, the tests look at these five factors:
- ownership of tools
- chance of profit/risk of loss
None of these factors is determinative on its own. You need to look at the whole picture.
What is considered when looking at the issue of control?
The control test addresses the payer’s authority to exercise control over the work that will be done and the way it will be done. Even if such control is never exercised, the fact that control exists is strong evidence of an employer/employee relationship. A payer might be entitled to stipulate what an independent contractor will do or what result is to be achieved, but not how the work will be completed.
When examining this issue, a court, tribunal or government body will consider matters such as the following:
- Does the worker work mostly on his/her own or is s/he under the payer’s direction and control regarding the time spent working and how the work is done?
- Does the payer set out an order or sequence for the worker to perform assigned tasks? Or can the worker follow his/her own pattern of work?
- Does the worker have specified hours of work, or can s/he choose his/her own time of work?
- Was the worker hired for a specific task or job, and will the relationship be over once that work is completed?
- Is the worker free to accept or refuse other work from other payers?
- Is the worker free to accept or refuse work from the payer?
- Is the worker required to work at the payer’s place of business?
- Does the worker have to do the work himself or herself? Or could the worker hire helpers or subcontract the work to others
- Does the worker perform tasks that are normally (or previously were) performed by an employee?
- Does the payer give the worker instruction and supervise, scrutinize, or control him/her? Is the worker subject to discipline?
- Can the payer dismiss the worker? An independent contractor normally cannot have his/her work terminated without liability, as long as he/she produces a result that measures up to the contract specifications.
- Are evaluations done? If so, who does them?
Again, no single factor is determinative, but the greater the degree of control, the greater the likelihood that the person is an employee.
What is considered when looking at the issue of ownership of tools?
The ownership of tools test has a broad application. The word tools can be interpreted to mean, for example, space, supplies, materials, furnishings, phones, computers, and equipment.
In general, a worker is more likely to be in an employment relationship if s/he uses tools, space, supplies, materials, furnishings, and equipment owned by the payer. If, on the other hand, the worker owns or rents the tools, materials, and facilities s/he uses to perform services, s/he is more likely to be an independent contractor. Other aspects of this issue include who bears the cost of replacing the tools and who retains the tools when the work is complete.
Some employees such as mechanics customarily use their own hand tools. The courts have recognized that some employers require employees to provide their own tools and/or vehicles.
What is considered when looking at the issue of chance of profit/risk of loss?
The chance of profit/risk of loss test addresses whether the worker is earning a fixed wage or salary or ongoing commission. Or is the worker in business to make a profit and therefore at risk of losing money?
When a court, tribunal, or government agency is considering this issue, they may ask questions such as these:
- Does the person have a chance of profit? If his/her income is always the difference between the cost of providing the service and the price charged for the service, the worker may be a contractor.
- Is the person at risk of losing money if the cost of doing a job is more than the price charged for it? If not, the person is likely an employee.
- Does the worker have a financial investment in the business, over and above providing labour?
- Who has the liability if the worker is negligent in completing the work, or if the work is not completed?
What is considered when looking at the issue of integration?
The integration test addresses whether the work being done is really integral to the payer’s business. Is it part of the everyday work, or can it be considered separate?
In an employment relationship, a worker is employed as part of the business and is integral to the business. Under a contract, however, an individual’s work, although it may be done for the business, is really ancillary. Therefore, integration has to be considered from the point of view of the worker, not the payer.
- A worker who integrates the payer’s activities into his/her own business activities has a more independent status. The worker is acting on his/her own behalf, the work is separate from the payer’s business activities, and the worker is not dependent on the payer’s business.
- A worker who integrates his/her activities into the business activities of the payer likely has an employer-employee relationship. The worker is acting on behalf of the payer; s/he is connected with and dependent upon the payer.
What is considered when looking at the issue of payment?
The payment test considers the financial details of the relationship between the worker and the payer.
Certain factors are generally considered strong evidence of an employer/employee relationship. For example:
- Does the worker receive continuous payments of regular amounts at set intervals (as opposed to a lump sum)?
- Does the worker receive payments regardless of customer satisfaction or customer payment?
- Does the payer pay for the worker’s traveling expenses and other expenses incidental to the payer’s business?
- Does the payer contribute to employee benefit plans on behalf of the worker, and are the plans for the specific benefit of employees?
- Is the worker trained by an experienced employee, correspondence, required attendance at meetings, or other methods that the payer controls? (A contractor generally uses his/her own methods and comes with?and is hired specifically for?his/her own expertise.)
Who exactly conducts the common law tests, and when?
The common law tests may be needed at various stages of the employment or business relationship. For example, the following programs or agencies may consider worker/payer relationships:
- a government program or agency such as the Canada Pension Plan, Employment Insurance or the Canada Revenue Agency, especially if there is a dispute between the parties, or the program or agency suspects that the essence of the relationship is not as previously asserted (even if both parties agree)
- a tribunal or court, if a dispute arises between the parties (for example, a Workers’ Compensation Board issue)
- a court, if there is a third party negligence claim
Are there any exceptions or special situations?
Special rules concerning the Canada Pension Plan, Employment Insurance, and income tax apply to workers engaged in certain occupations These occupations include:
- barbers and hairdressers
- taxi drivers and drivers of other passenger-carrying vehicles
- placement and employment agency workers
- employees outside of Canada
For more information, visit the links listed at the bottom of the page.
How can I confirm the nature of the relationship before it becomes a problem?
Either party can request an “advance ruling” from the Canada Revenue Agency. An advance ruling can provide much certainty about the status of the relationship being entered into. However, this process can take quite a bit of time.
To request an advance ruling, use Form CPT1, Request for a Ruling as the Status of a Worker under the Canada Pension Plan and/or the Employment Insurance Act, available at http://www.cra-arc.gc.ca/E/pbg/tf/cpt1/README.html or by calling 1.800.959.2221.
What are the risks of using the wrong label?
If a payer treats a worker as an independent contractor and some legal forum determines otherwise, the financial liability could be enormous.
- The payer will be forced to remit to the government all the deductions it should have made from the employee’s pay (e.g., Employment Insurance, Canada Pension Plan, income tax), plus any interest and penalties that apply.
- If a payer incorrectly describes many employees as contractors and the workers successfully complain to the Employment Standards Tribunal, the payer will owe these workers additional payments for such items as overtime and vacations, plus any penalties imposed.
If a worker believes s/he is a contractor and finds out later that s/he was an employee, the worker may have to resubmit applicable income tax returns and may owe monies, including penalties. For example, the worker may have deducted numerous expenses that an employee is not permitted to deduct.
Note: An agreement that labels a worker as either an employee or an independent contractor is not binding on the government or any other legal forum. The tests discussed earlier provide some guidance but these issues are often not clear-cut.
Will I be subject to any penalties if I get this wrong?
Yes. If the payer is audited and the Canada Revenue Agency rules that “contract workers” are actually employees, the payer will be responsible for, at minimum:
- Canada Pension Plan and Employment Insurance employer and employee contributions for the current year and the previous year; AND
- a 10% penalty on the total assessment; AND
- interest of approximately prime +1% from the date each of the contributions were due.
The employee will be responsible for, at minimum, personal back taxes, if unpaid.
- Human rights in the workplace
- Workplace Health and Safety
- Alberta Human Services – Employment Standards
- Alberta Human Services – Administering the Employment Standards
- Alberta Human Services – Vacation Pay
- Alberta Human Services – Minimum Wage
- Alberta Human Services – Minimum Wage Fact Sheet
- Alberta Human Services – File a Complaint with Employment Standards
- Workers’ Compensation Board Alberta
- Employment Insurance
- Canada Revenue Agency – Payroll Information
- Canada Revenue Agency’s Employee or Self-Employed
- Service Canada, SIN Information
- Canada Labour Code
- List of occupations that are exempt from overtime in Alberta (in the Overtime Hours Fact sheet
- Alberta Labour Relations Code
- Alberta Human Rights Act