Is my worker an independent contractor or an employee? This is a common question that many employers ask but often times struggle to determine definitively if their worker is a contractor or an employee.
It is critical that employers correctly characterize the relationship. If not, the ramifications can be considerable including liability for assessments, penalties, unpaid wages, vacation pay etc. We have to remember that there is no single and conclusive test to determine whether a worker is an independent contractor or employee. There are numerous factors to consider and each situation requires a thorough assessment.
Why is the distinction so important?
When we examine whether a worker is an independent contractor or employee, the key question we ask is whether the person is engaged to carry out services as a person in business on his or her own account or as an employee.
If a worker is considered an employee, the employer is responsible for the following:
|Employers are legally obligated to deduct, contribute, and remit payroll deductions on behalf of their employees. These include WCB, EI, CPP, income tax, deduction of taxes.
An employer must also act in compliance of the Employment Standards Act – ie. vacation, leave, overtime, statutory holidays, minimum wages
|The employer is legally liable for the acts of their employees
|The employer must provide notice/severance pay
What is the core difference?
The central issue is around control. With employees, the employer has control over their day-to-day activities whereas an employer cannot exercise control over independent contractors including, but not limited to, control of time, place, supervision, discipline, told what to do and how to do it.
What tests can be done to distinguish between an independent contractor and employee?
The four-point test is the standard that the Canada Revenue Agency uses to determine which type of relationship exists. Their document Employee or Self-Employed? (RC4110) “sets out a method that should, in most cases, allow payers and workers to determine the nature of their relationship.”
A thorough assessment of a worker-payer relationship comprises of elements from each of the following common law tests:
Control: This test assesses the ability, authority, or right of the employer to control the actions of the worker, including the amount, nature, location, supervision, discipline and management of the work to be done. Essentially, it’s the employer exercising control over the work including what to do and how to do it.
Economic Reality: This test explores the economic practices of the worker, including whether he or she bears the ultimate responsibility for any profit or loss of the contract. An individual who faces financial risk, bears all responsibility for profit or loss, and accounts for all costs incurred in the pursuit of profit, is likely to be determined a contractor.
Fourfold: This test incorporates the following factors indicating an employee/employer relationship: (a) control; (b) ownership of the tools; (c) chance of profit; and (d) risk of loss. Control in itself is not always indicative.
- Ownership of tools: As a business owner, if you own the tools that you provide to your worker, then this typically points in the favour or an employer/employee relationship. Often times, an independent contractor will provide their own tools and equipment to get the job done.
Organization/Integration: This test considers an individual’s role within an organization and determines whether their role is an integral part of the functioning of the company. If deemed an integral component of the business, this reflects an employer/employee relationship. On the contrary, if a worker has several contracts in place with different clients, then this points in favour of an independent contractor. If the services are supplementary or separate altogether, then the individual may be better viewed as a contractor.
What are some notable differences between an independent contractor and employee?
Here’s a table to help you distinguish between the two relationships.
|Likely an Independent Contractor
Likely an Employee
|Signs off on independent contractor agreement to initiate employer/contractor relationship
|Signs off on employment contract to initiate employee/employer relationship
|Faces financial risk, bears all responsibility for profit or loss and accounts for all costs incurred in the pursuit of profit
|Bears no responsibility for profit or loss of the company
|Is solely responsible for own business costs (i.e. rent, insurance, supplies etc.)
|Is not responsible for business costs (i.e. rent, insurance, supplies, etc.)
|Hours, schedule, days of work are determined by the worker
|Hours, schedule, days of work, start/finish times, lunch/break times, vacations are determined by the company
|Worker decides how to perform the work in order to meet end-result and established deadlines set by the company
|Performance is monitored and work is directed and supervised
|Works for other clients/employers
|Works exclusively for the company
|Paid a rate (negotiated by the employer and contractor) for service(s) rendered
|Paid hourly/salary basis with rate established by the company
|Registered with and pays for own WCB
|Covered by employer paid WCB coverage
|Paid upon invoicing the employer for services rendered, including GST/PST where required and without statutory deductions
|Receives regular paycheques with statutory deductions
|Covers own benefits coverage and makes own RRSP contributions
|Receives employment benefits (health, dental, AD&D etc.) and participates in company group benefits, pension and RRSPs
|If work is deemed unsatisfactory, the employer cannot issue disciplinary action but rather can terminate the contract
|Subject to disciplinary action for poor performance and/or misconduct
|Able to engage or hire other workers (subcontractors) to complete the work
|Cannot engage or hire other workers to complete the work assigned
|Provides his/her own work space, tools and equipment
|Uses company space, tools and equipment
|Responsible for developing own skills and engaging in training to upskill
|Trained by employer to meet job scope and business expectations
|Provides services that is considered supplementary to business operations
|Performs work that is considered integral for business operations
|Accountable to comply with only requirements for contractors, not employees
|Accountable to comply with all company rules, policies and procedures
Disclaimer: Please be aware that information provided in this blog is subject to change. We recommend that you do not take any information held within as a definitive guide to the law or the relevant matter being discussed. You are advised to seek legal or professional advice where necessary. Due to the nature of the matters discussed in this blog, the information contained within it and any pages linked to/from it are clearly subject to change, without warning.
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