Understanding the Difference Between Independent Contractor and Employee in Canada

In Canada, the distinction between an independent contractor and an employee is significant, as it affects the legal rights and obligations of both parties.

An employee is someone who works for an employer under an employment contract. The employer has control over the employee’s work, including how, where, and when the work is performed. The employer is also responsible for deducting income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums from the employee’s pay and remitting them to the Canada Revenue Agency (CRA). Employers must also provide certain benefits to their employees, such as vacation pay, sick leave, and statutory holidays.

On the other hand, an independent contractor is someone who provides services to a client or customers under a contract for services. An independent contractor has more control over their work, including how, where, and when it is performed. Independent contractors are responsible for paying their own income taxes and CPP contributions, and they are not entitled to receive benefits like vacation pay or statutory holidays.

Factors to Determine the Status of a Worker

There are various factors that determine whether a worker is an independent contractor or an employee, including the degree of control the employer has over the work, the level of independence the worker has, the tools and equipment used to perform the work, and the degree of financial risk involved in the work.

Choosing Between Independent Contractor and Employee

Choosing whether to hire an independent contractor or an employee depends on the needs of the business. Independent contractors are usually hired for short-term or project-based work, while employees are hired for long-term and ongoing work. Hiring an independent contractor can be more cost-effective for the business, as they are responsible for their own taxes and benefits. However, hiring an employee can provide more stability and control over the work being performed.

Risks of Misclassification

Misclassifying a worker as an independent contractor when they should be an employee can have serious consequences for the employer. The CRA can impose fines and penalties for failing to remit the proper taxes, and the employer may be required to pay back wages and benefits owed to the misclassified worker. It is important for employers to carefully consider the factors that determine whether a worker is an independent contractor or an employee and to seek legal advice if necessary.

Common Law Test Used in Canada to Determine Independent Contractor vs. Employee Status

In Canada, there is no single test that is applied in court to determine whether a person is an independent contractor or an employee. The classification of a worker is determined on a case-by-case basis, taking into account various factors that indicate the level of control the employer has over the worker.

However, the Supreme Court of Canada has developed a common law test to determine whether a worker is an independent contractor or an employee. The test is based on the degree of control the employer has over the worker, and it considers a number of factors, including:

1. Control: The degree of control the employer has over the worker’s activities, including how the work is performed, when it is performed, and where it is performed.

2. Ownership of Tools and Equipment: Whether the worker provides their own tools and equipment, or whether the employer provides them.

3. Chance of Profit and Risk of Loss: Whether the worker has a chance of making a profit or incurring a loss based on the work they perform.

4. Integration: The degree to which the worker is integrated into the employer’s business, including whether they are subject to the same rules and policies as other employees.

5. Exclusivity: Whether the worker is exclusively working for the employer or whether they are free to work for others.

6. Specific Results: Whether the worker is paid to achieve a specific result or to perform a specific task.

7. Subcontracting: Whether the worker is allowed to subcontract the work to others.

These factors are not exhaustive, and no one factor is determinative. Instead, the court will consider all of the relevant factors in each case to determine the nature of the worker’s relationship with the employer.

 

Case Study

Construction project company (Evergreen) agreed to engage worker (“Jan”) as a house painter. Was she an independent contractor?

• Jan was paid $35/hour as a painter. She submitted invoices for hours worked on a bi-weekly basis.
• Compensation varied from week to week as work fluctuated. No payroll deductions were made from Jan’s payments. There were no benefits.
• Jan brought her own painting equipment but was provided with paint.
• Jan was assigned houses by Evergreen manager. She could accept or decline and was allowed to determine her own working hours.
• Jan thought she was an employee of Evergreen, but Evergreen did not require her to refrain from working for anyone else.
• Jan only worked for Evergreen during the 16 months the parties worked together.
• There was no written contract, only an oral agreement.

Answer to Case Study

Jan’s status: Independent Contractor.

See Fisher v. Hirtz, 2016 CarswellOnt 12103 (Ont. S.C.J.)

• Despite lack of written agreement, parties’ conduct indicated independent contractor relationship.
• Jan was able to refuse work and determine her own hours. This shows minimal control.
• Jan worked only for Evergreen but this was not an obligation, she could have accepted other work. This shows no exclusivity.
• Use of tools was minimally important. Jan supplied some tools, Evergreen supplied paint.
• Evergreen’s practices showed intention to engage independent contractors as a workforce (fluctuating work, invoicing, no payroll deductions, etc.).

 

Conclusion

understanding the difference between an independent contractor and an employee in Canada is crucial as it affects the legal rights and obligations of both parties. The classification of a worker is determined on a case-by-case basis, considering various factors such as the degree of control, ownership of tools and equipment, chance of profit and risk of loss, integration, exclusivity, specific results, and subcontracting. Employers must carefully consider the nature of the worker’s relationship with the employer and seek legal advice if necessary to avoid misclassifying workers, which can lead to serious consequences.

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