Difference Between Employees and Independent Contractors

What is the difference between an employee and an independent contractor?

Employees and independent contractors are two different types of worker statuses. Whether you are an an employee or contractor determines your entitlement to employment insurance benefits and how you are treated under the law.

If you are an employee, you:

• are protected under the common law and employment legislation (the Code), which covers things like minimum wage, holidays, overtime, termination, and notice
• are covered by workers’ compensation legislation without having to pay premiums (if applicable)
• generally have an exclusive, and sometimes long-term, relationship with your employer
• will have income tax, Canada Pension Plan, and Employment Insurance payments deducted from your pay cheque and remitted on your behalf (rather than having to remit them yourself);
• may have employer-paid benefits such as health care, sick leave, pension plan, professional development, parking, and gym membership
• cannot claim tax benefits (e.g., deductions for work-related expenses)

If you are an independent contractor, you:

• are considered self-employed and not covered by most employment protection under both the common law and employment legislation (the Code)
• may have to arrange and pay for you own work-related accident compensation
• are free to work for other organizations
• do not have statutory deductions applied to your pay and must provide your own tax, Canada Pension Plan, and Employment Insurance payments to the government, as well as paying for your own additional benefits
• can claim most reasonable business expenses as deductions on your yearly income tax returns

Last Reviewed: August 2019

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 the contract calls the relationship.

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.

Last Reviewed: August 2019

How can I know if I am (or my worker is) an employee or an independent contractor? What are the common law tests?

Canadian courts and tribunals have developed common law tests to determine who is an employee and who is an independent contractor.

In general, the tests look at these five factors:

• control
• ownership of tools
• chance of profit/risk of loss
• business integration
• payment

None of these factors is determinative on its own. They must be examined and weighed together to decide whether someone is an employee or independent contractor. Also, courts and tribunals can consider other factors they think are necessary to help make a decision.

Last Reviewed: August 2019

What is the control test?

The control test addresses the employer’s authority to exercise control over the work that will be done and the way it will be done. Generally, the greater the level of control  over the person working, the more likely they are an employee. Even if such control is never exercised, the fact that control exists (and could be exercised) is strong evidence of an employer/employee relationship. An employer might be able to control some aspects of an independent contractor’s work (for example the work an independent contractor will do or by setting deadlines), but not how the work will be completed.

The control test has developed over time to focus on administrative control, which is a broader control over workers and how they fit into the employer’s organization. Workers who have specialized jobs that allows them a great deal of discretion, or workers who work from home may still be employees if their employers exercise administrative control over them.

When considering control, a court, tribunal, or government body will consider the following:

• Does the worker work mostly on their own or are they 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 their own pattern of work?
• Does the worker have specified hours of work, or can they choose their own time of work?
• Was the worker hired for a specific task or job? Will the relationship between the worker and payer be over once that specific job or task is completed?
• Is the worker free to accept or refuse other work from other payers?
• Is the worker free to accept or refuse other work or tasks 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 of the payer?
• Does the payer give the worker instruction and supervise, scrutinize, or control him or 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?

No single factor is determinative. The greater the degree of control the worker has over the activities, the greater the likelihood that the person is a contractor.

Last Reviewed: August 2019

What is the ownership of tools test?

The ownership of tools test has a broad application. The word tools can mean such things as space, supplies, materials, furnishings, phones, computers, and equipment.

In general, workers are more likely to be in an employment relationship if they use tools, space, supplies, materials, furnishings, and equipment owned by the employer. If, on the other hand, the worker owns or rents the tools, materials, and facilities they use to perform services, they are more likely to be independent contractors. Other aspects of this test include who bears the cost of replacing the tools and who retains the tools when the work is complete.

While still a relevant consideration in the determination of a worker’s status, this factor may carry less weight than the others. 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. Also, if workers own their own tools or equipment but work exclusively (or almost exclusively) for one employer, they may be treated as employees under the law and will be entitled to certain benefits and protections.

Last Reviewed: August 2019

What is the chance of profit/risk of loss test?

The chance of profit/risk of loss test addresses whether the worker is earning a fixed wage, salary, or ongoing commission, or is the worker in business to make a profit and therefore at risk of losing money? Generally, employees make a steady income and do not incur losses or profits.

When a court, tribunal, or government agency is considering this test, it may ask questions such as:

• Does the worker have a chance of profit? If their 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?

Last Reviewed: August 2019

What is the business integration test?

The business integration test addresses whether the work being done is really integral to the employer’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, an individual’s work, although it may be done for the business, is separate. So integration is considered from the point of view of the worker, not the employer.
• Workers who integrate the employer’s activities into their own business activities have a more independent status. They act on their own behalf, the work is separate from the employer’s business activities, and they are not dependent on the employer’s business.
• Workers who integrate their activities into the business activities of the employer likely have an employer-employee relationship. They are acting on behalf of their employers and are connected with and dependent upon the employers.

Last Reviewed: August 2019

What is the payment test?

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 employer’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, through correspondence, required attendance at meetings, or other methods that the employer controls? Independent contractors generally do not require training because they have expertise when they are hired.
• Were the payments for the work performed made to the worker as an individual, to his/her corporation or to his/her registered business name?

Last Reviewed: August 2019

Who conducts these 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 parties 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 court, if disputes arise between the parties (for example, whether a worker is entitled to reasonable notice prior to termination or if a third party negligence claim is made); and
• certain tribunals addressing disputes between parties that fall within their jurisdiction (for example, a Workers’ Compensation Board issue).

Last Reviewed: August 2019

Are there special rules for Canadian Pension Plan (CPP) and Employment Insurance (EI)?

Yes, 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;
• fishers;
• placement and employment agency workers; and
• certain types of employees working outside of Canada

More information is available on the Government of Canada website.

Last Reviewed: August 2019

How can I confirm the nature of my working 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”  or call 1.800.959.2221.

Last Reviewed: August 2019

Are there risks if a worker is wrongly categorized as an employee or an independent contractor?

• If an employer treats a worker as an independent contractor and a judge, commissioner or government program administrator later determines otherwise, the financial liability could be serious.
• The employer 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 an employer incorrectly describes many employees as contractors and they successfully complain to the Employment Standards Tribunal, the employer will owe these workers additional payments for such items as overtime and vacations, plus any penalties imposed.
• The employer will also have to treat the worker as an employee going forward, including applicable entitlements like overtime or vacations.
• If workers believe they are contractors and find out later that they are employees, they may have to resubmit applicable income tax returns and may owe money, including penalties. For example, the worker may have deducted numerous work related expenses that an employee is not permitted to deduct.

An agreement that labels a worker as either an employee or an independent contractor is not binding on the government or any other legal decision-maker. The determination will be made based on the common law tests discussed above.

Last Reviewed: August 2019

Will an employer be penalized for wrongly categorized workers?

Yes, if the employer is audited and the Canada Revenue Agency rules that “contract workers” are actually employees. The employer will be responsible for all the following, at minimum:

• Canada Pension Plan and Employment Insurance employer and employee contributions for the current year and the previous year
• A 10% penalty on the total assessment
• 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.

Last Reviewed: August 2019