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Key Differences between Contractors and Employees

Key Differences between Contractors and Employees

Before you hire your next team member, it's important that you first understand the difference between an independent contractor and an employee.  Just because you call someone a contractor or an employee, doesn't mean that they are!

Instead, there are a number of other factors that come into play when either you, the government or in really unfortunate circumstances, a judge, makes that determination.   

Keep in mind, the most heavily weighted factor is the degree of control you will have over the team member and the work you are asking them to perform. As a rule of thumb, the more control you have, the more likely that team member is to be classified as an employee. On the other hand, the less control you have, the more likely they are to be classified as an independent contractor. 

Let's dive into some of the nuances. 


First, if you hire someone with the intention of having a lot of control over the work being performed, such as a set weekly schedule or location the work is to be completed, and are providing the equipment needed for your team member to perform the work (like a computer and access to software), these factors all show a higher level control over the work and that the relationship is likely that of an employee-employer. Further,  if the team member has no real financial incentive based on performance and doesn't operate their own business or work for other "clients" this relationship is very likely to be classified as employee-employer relationship.

If this is the case, as an employer, you need to be deducting taxes at source (from your employees paycheque) and providing other benefits such as employment insurance, CPP, vacation pay and workers compensation. You also may owe severance pay in the event of termination. As an employer, you're also liable for the actions of your employees and so your insurance should provide coverage for this. 

Independent Contractor

On the other hand, independent contractors are, well, more independent! A contractor is typically hired to perform services that are outside the scope of business performed by the person hiring them. For instance, before I launched my website, I hired a contractor to write the copy, since this is totally outside the scope of my business. Contractors generally have their own business, work with numerous clients, set their own rates and supply their own tools. Further,  they control the manner and method in which they perform the work such as their schedule, location and whether or not they hire subcontractors to help perform the services. In terms of the ownership of intellectual property, a contractor will own any intellectual property created as part of the work unless otherwise specified as part of their contract. In an employee-employer relationship, the intellectual property created as part of the work is typically owned by the employer.

Since contractors own their own business, they are responsible for submitting their own taxes and don't get the benefits afforded to employees under the relevant employment legislation in their home province. 

But when does this become an issue, and how does the government really find out?

Well, usually when a contractor doesn't pay their taxes, they get audited,  claim they were an employee and those taxes should have been deducted at source. This is when the onus is then on the business owner to provide evidence that the relationship was one of a contractor, versus an employee-employer. A contract with "Independent Contractor" written in bold simply won't cut it. They will want proof of the factors set out above. As will a judge in the event of any kind of dispute. 

Why do I need to get this right?

Given the upswing of the gig economy and often the preference for small business owners to hire contractors over employees, the government is paying closer attention and examining these relationships closely. For business owners, there are hefty penalties if the government determines that one of your team members is really an employee (not a contractor) and you'll owe back payments for unpaid EI and CPP - not fun. In the event of a termination, you could also be found liable for severance pay if it is determined that it was an employer-employee relationship.  Also not so fun.

So before you hire, dig a little deeper into the relationship that will be formed based on what your needs are for your business. If you aren't completely sure, I always recommend talking with a local lawyer rather than lose sleep worrying or operating in the grey zone. A little more information up front could save you a huge headache and tax bill down the road. 

If you need a contract to hire your next Independent contractor for your business, check out our contract here or hiring bundle here





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