Understanding Contracts: Independent Contractor vs. Employee

The line between independent contractors and employees can be murky. The courts and the Canada Revenue Agency look at multiple factors and tests to determine whether someone is an independent contractor or an employee.

One important thing to keep in mind: Just because you’re being characterized as an independent contractor, that doesn’t mean that at law you are. Sometimes employer’s characterize workers as independent contractors to try and reduce their remittance obligations (i.e. CPP, EI and Income Tax withholdings), but not understanding the law will not excuse an employer’s obligations.

Factors that CRA and Courts Look At When Making Determinations

In determining whether someone is in fact an independent contractor or employee, CRA and the courts will consider the following factors:

• What is the nature of the relationship? For example, is there a contract for service for a limited period?
• What is the degree of control? Can the individual work for someone else too and set their own hours?
• Does the worker own their tools, or do they belong to the employer?
• What is the opportunity for profit or risk of loss?

To expand on the last question, what happens if a job takes longer than planned or costs more than originally budgeted? For example, an independent contractor may give an employer one big price quote for the work to be done. The quote takes into consideration an hourly rate plus other costs and expenses. When independent contractors get this price wrong, they are generally on the hook to suffer that loss.

As the CRA website explains: “Self-employed individuals normally have the chance of profit or risk of loss, because they have the ability to pursue and accept contracts as they see fit. They can negotiate the price (or unilaterally set their prices) for their services and have the right to offer those services to more than one payer. Self-employed individuals will normally incur expenses to carry out the terms and conditions of their contracts, and to manage those expenses to maximize net earnings. Self-employed individuals can increase their proceeds and/or decrease their expenses in an effort to increase profit.”

Compare that with employees. They’re paid hourly or with a salary. It doesn’t matter if they do a fantastic job or not, or if the employer misjudged how long a project would take—employees normally get paid in a stable way. Employers also generally pay for their employees to take courses or to go to conferences. They wouldn’t do that for independent contractors.

The penalties for an employer who has misclassified an employee as an independent contractor can be severe. The employer may owe retroactive pay, vacation pay, overtime pay and so on, as well as unpaid tax to the government. It’s important for employers to get on the right side of the independent contractor vs employee question.

Benefits of Being an Employee vs Independent Contractor

If you’re an employee, you enjoy advantages that include comfort and stability, being paid at least a minimum wage, and entitlement to employment insurance and employer benefits such as benefits and vacation pay. There is also less administrative work than if you’re an independent contractor since employers handle CPP, IE and income tax deductions from your pay.

Benefits of Being Independent Contractor vs Employee

If you’re an independent contractor, there are some pros such as flexibility and the ability to write off more expenses than an employee. You’re free to work for whom you choose and when you choose (subject to any contractual commitments you’ve made). You can also hire other parties to help you with the work or to do it all. Intellectual property and copyright rights can also come into play. In the absence of a contract taking certain steps, independent contractors retain rights to work they created—something many employees don’t do.

Letting the Individual Choose

Some companies are giving workers a choice of whether they’d prefer to be an independent contractor vs employee. In fact, some companies are paying you more if you choose to be an independent contractor. No matter whether you’re an employee or an independent contractor, make sure you understand the contract you’re being asked to sign. A lawyer can help with that.