Contractor vs Employee: Which is Better for Your Business in Canada?
By Daniel Schoester | Published on 31 May 2023
Table of Contents
In Canada, there is a legal distinction between employees and independent contractors. Employees are entitled to certain benefits and protections under the law, such as overtime pay and paid vacation. Independent contractors are not entitled to these same benefits and protections.
The distinction between employees and independent contractors is important because it determines the rights and responsibilities of both parties. Businesses that misclassify employees as independent contractors can be subject to fines and penalties. The Canada Revenue Agency (CRA) outlines several factors to define an independent contractor. These factors include the business’s degree of control over the work, the worker’s opportunity for profit or loss, and the worker’s investment in equipment and facilities.
Independent contractors can offer businesses several advantages, such as reduced costs and greater flexibility. However, there are also some risks associated with hiring independent contractors, such as the potential for misclassification and legal liability. Ultimately, deciding whether to hire independent contractors is complex and should be made case-by-case. Businesses should carefully consider all of the factors involved before making a decision.
Comparing Contractors vs. Employees
There are two distinct categories of workers: employees and independent contractors. Companies hire employees for long-term engagements. Whereas independent contractors fulfill specific tasks or projects, employees have regular duties. They also receive a salary or hourly wage, rather than a fixed fee or hourly rate.
Employees enjoy benefits such as minimum wage, overtime pay, and paid vacation, which independent contractors do not receive. Additionally, companies require employees to follow the company’s policies and procedures strictly. Independent contractors can operate more independently. Legal definitions consider employees as company personnel, while an independent contractor qualifies as self-employed.
| Aspect | Employees | Independent Contractors |
|---|---|---|
| Hiring | Hired on a long-term basis | Hired for specific tasks/projects |
| Payment | Salary or hourly wage | Fixed fee for services, can have hourly rates |
| Entitlements | Minimum wage, overtime pay, paid vacation, etc. | No entitlements to benefits such as minimum wage, overtime pay, etc. |
| Company Policies | Subject to company’s policies | More independent |
| Legal Classification | Considered employees for legal purposes | Considered self-employed for legal purposes |
Contractors
A contractor is a specialist or entity generally hired to perform a specific task or project. They can include Upwork freelancers, agencies, or individual service providers. Contractors typically have an agreement with the company outlining the scope of work, payment, and timelines.
Contractors work for themselves beyond the same employment laws as employees. This means contractors don’t qualify for minimum wage, overtime pay or paid vacation. Contractors are also less subject to the company’s policies and procedures.
There are many benefits to hiring contractors. Contractors can provide businesses with flexibility and expertise that may not be available in-house. They can also help companies to save money on labour costs.
However, businesses face some risks when hiring contractors. Contractors may not be as reliable or committed to the project as employees. They may also be more likely to file lawsuits if injured on the job. Additionally, if a worker is misclassified as an independent contractor when they are an employee, the business could be subject to fines and penalties.
Employees
An employee is someone or entity that works for a longer term. Companies typically pay employees with an hourly wage or salary. Labour practices generally entitle employees to minimum wage, overtime pay, and paid vacation. Employees are also subject to the company’s policies and procedures.
An employee can offer many advantages. They can provide stability and a sense of commitment to the company. They can also help businesses to save money on labour costs in the long run. However, hiring an employee can come with some risks. Employees may be less flexible than independent contractors and may not have expertise in specific areas. It can also be more difficult to remove an employee due to labour laws. This is especially true for union members.
Critical Considerations of Contractors vs. Employees
| Aspect | Employees | Independent Contractors |
|---|---|---|
| Tax Implications | – CPP/EI contributions deducted – Tax withheld from paycheques | – Responsible for paying income tax – May collect GST/HST |
| Cost of Hiring | Generally more expensive to hire | Generally less expensive to hire short-term |
| Workplace Benefits | Entitled to workplace benefits | Typically not entitled to benefits |
| Payment | Paid by cheque or direct deposit | Paid by invoice |
Tax Implications
The tax implications differ for employees and contractors. Employers actively make CPP and EI contributions on behalf of their employees, while contractors are exempt from making EI contributions. Employers withhold taxes from employees’ paycheques while contractors file and pay their income taxes. Additionally, contractors may collect GST/HST on their goods and services.
Cost of Hiring
The cost of hiring a contractor or an employee can vary depending on several factors, including the type of work, the worker’s skills and experience, and the business’s location. Generally, contractors tend to be less expensive in the short term and more expensive in the long term.
While companies generally pay contractors a higher hourly rate than employees, they also don’t require training and supervision. Businesses expect contractors to complete tasks more quickly and efficiently than employees. Similarly, companies also don’t make CPP and EI contributions on behalf of contractors.
On the other hand, employees typically require more investment in benefits and training. However, in the long run, businesses may save money on wages by hiring and training employees instead of contractors. Bringing labour in-house allows a company to spread out costs that the contractor’s rate otherwise would include.
Workplace Benefits
Employers in Canada generally provide employees with several workplace benefits, such as private health insurance, dental insurance, and retirement savings plans. Contrary to this, contractors typically do not qualify for these benefits. This means that contractors must make their own arrangements for health insurance, retirement savings, and other benefits. However, a contractor can negotiate these benefits in their contract for services.
Payment
Companies typically pay contractors by invoice. The contractor generally creates and submits an invoice to the company’s accounting department. Meanwhile, they pay employees by cheque or direct deposit.
Defining a Contractor vs. Employee (Outside of Quebec)
The Government of Canada has a set of factors businesses can use to determine whether a worker is an employee or an independent contractor. Multiple court rulings decided on these factors on the subject. Companies should consider all these factors before deciding who is an employee and an independent contractor. This is because there can be severe consequences for misclassifying a worker.
| Aspect | Employees | Independent Contractors |
|---|---|---|
| Control | Subject to the business’s direction and control and work methods | Typically free to set their hours and work methods |
| Tools and Equipment | Provided by the company | Responsible for their own |
| Subcontracting | Not allowed | Usually allowed |
| Financial Risk | Business bears the financial risk | Contractor bears the financial risk |
| Profit Motive | Not motivated by profit | Motivated by making a profit |
| Responsibility for Investment and Management | Business makes necessary investments and manages the worker’s work | Contractor makes necessary investments and manages their work |
Control
This represents the level of control that the business has over the worker’s work. For example, an employee is typically subject to the business’s direction and control over their job. Meanwhile, contractors are usually free to set their hours and work methods.
Tools and Equipment
This refers to who provides the tools and equipment necessary for the worker to do their job. It refers to many items, such as hammers, specialized clothing, musical instruments, trucks, etc. For example, the business typically provides employees with tools and equipment. A contractor is usually responsible for providing their own.
Subcontracting
This refers to whether the worker can subcontract or assign their work to someone else. An employee usually cannot do this. A contractor may typically subcontract their work if they wish.
Financial Risk
This refers to who bears the financial risk regarding the labour performed. For example, businesses usually bear the financial risks associated with employees’ labour. Contractors typically bear the financial risk of their labour.
Profit Motive
This refers to those motivated by a desire for profit. For example, employees rarely receive additional incentives from profits the business earns. However, contractors usually become motivated by the potential to make a profit.
Investment and Management Responsibility
This refers to who makes necessary investments and manages the worker’s work. For example, businesses typically make necessary investments in employees’ work and manage it. Contractors usually make their investments and manage their work.
Defining a Contractor vs. Employee (Inside Quebec)
Quebec has a different method to determine who is a contractor and an employee. While the rest of Canada uses a series of factors, Quebec uses a three-step process. Follow these three steps:
- Intent: The CRA seeks clarification on the nature of the relationship between the worker and the payer. Specifically, they want to understand whether the two parties intended to pursue an employer-employee relationship or a business partnership and the reason behind this decision.
- Legal Definitions: The CRA reviews whether you work for someone or have a business based on specific factors outlined in the Civil Code of Québec. This includes factors such as carrying out the work, remuneration, and the relationship of subordination.
- Comparison: The CRA checks if the parties’ intentions align with the legal definitions of an employee or a contractor.
Indicators of an employer-employee relationship include the payer directing and controlling various aspects of the work, establishing rules and disciplinary actions, and providing training or direction. Meanwhile, signs that someone is self-employed are being able to choose their schedule and clients, having the option to work for multiple employers, and delegating tasks to others.
Understanding CPP and EI for Contractors vs. Employees
The Canada Pension Plan (CPP) and Employment Insurance (EI) are social insurance programs that benefit Canadian workers and their families. CPP provides retirement income, disability benefits, and survivor benefits. EI benefits workers who are unemployed, on maternity or parental leave, or caring for a critically ill child.
If a worker is an employee, then their employer is responsible for making CPP and EI contributions on their behalf. If a worker is a contractor, they are responsible for making their own CPP and EI contributions. Contractors can optionally contribute to EI or not.
However, it’s important to note that misclassification of workers can have serious consequences. If an employer misclassifies an employee or a contractor, they may be liable for back CPP and EI contributions. Additionally, the worker may be entitled to back pay and other benefits. The remainder of this section will discuss contributions to each program.
CPP Contributions
Employers must actively make CPP contributions on behalf of their employees, encompassing both the employer’s portion and the employee’s share. The employer actively withholds the employee’s share is from their paycheck. Contractors actively assume responsibility for contributing their own CPP contributions, with an equal split between the employer and employee portions. It is important to note that CPP does not apply within Quebec.
EI Contributions
Employers must make EI contributions on behalf of their employees, with the rate being based on the employee’s gross salary or wages. On the other hand, contractors do not have to make EI contributions, but they can opt in by actively submitting a request.
Tax Writeoffs for Contractors Vs. Employees
The tax write-offs available to contractors and employees in Canada are different in a few key ways. First, contractors are responsible for paying their taxes, while employees have their taxes deducted from their paychecks by their employers. This means contractors must keep track of their income and expenses throughout the year to file their taxes accurately. A common way to do this is using a business credit card. Second, contractors have a wider range of expenses to claim as tax deductions. This includes business insurance, car expenses, advertising fees, and more.
On the other hand, employees have limited tax deductions available. They can claim only a few expenses, such as union dues and uniforms. It is important to note that the Canada Revenue Agency (CRA) has specific rules governing eligible tax deductions. Contractors and employees should actively seek the advice of a tax professional to ensure they claim all the entitled deductions. Here is a table that actively summarizes the critical distinctions in tax write-offs for contractors and employees in Canada:
| Characteristic | Contractor | Employee |
|---|---|---|
| Employer withholds taxes? | No | Yes |
| Range of expenses that can be claimed as tax deductions | Wider | Narrower |
| Examples of expenses that can be claimed as tax deductions | Advertising, business insurance, car expenses, equipment, office supplies, professional fees, rent, travel | Union dues, uniforms |
| Need to consult with a tax professional | Yes | Yes |
Contractors vs Employees: The Bottom Line
Hiring independent contractors can be an excellent way for businesses to save money and gain flexibility. However, it is crucial to classify workers correctly and comply with all applicable laws. Ultimately, deciding whether to hire independent contractors is complex and should be made case-by-case. Businesses should carefully consider the benefits and drawbacks before making a decision.
FAQs About Contractors Vs. Employees in Canada
No single test determines whether a worker is an employee or an independent contractor. Instead, courts consider several factors, including the degree of control the employer has over the worker’s work, the worker’s opportunity for profit or loss, and the worker’s investment in equipment or materials. Additionally, the right to subcontract work.
Independent contractors are typically less expensive in the short term. They don’t have the same employment-related benefits as employees, such as vacation pay, sick leave, and health insurance. Additionally, independent contractors are not subject to the same employment laws as employees, such as minimum wage and overtime.
Independent contractors are not entitled to overtime pay under Canadian law. However, they may be able to negotiate overtime pay with their clients. This will be defined in the contract.
Whether or not your business insurance covers independent contractors depends on the terms of your policy. It is essential to check with your insurance company to see if your policy covers independent contractors.
The terms of their contract should pay Independent contractors. The contract should specify the amount of payment, the payment schedule, and the payment method. You can pay independent contractors by cheque, Wise or direct deposit.
Board members are typically considered to be independent contractors. This is because board members are not subject to the same level of control by the company as employees. Additionally, board members are typically compensated for their services per meeting, a common characteristic of independent contractors. Whether a board member is, an employee or an independent contractor is ultimately up to the courts.
Yes, an independent contractor can be fired. However, the contract terms between the independent contractor and the company will typically specify the grounds for termination. Independent contractors may also be entitled to severance pay if terminated without cause.
