Independent Contractors & Employment Guidelines in Canada
Contract length allowance
There are no limitations on the use of genuine independent contractors in Canada. However, cases where a contractor has been providing services to the company for many years, with little to no other customers, and where the worker becomes dependent on that one income, may classify the relationship as employment. Use of company tools, direction of hours/schedule, and no risk of financial losses also suggest employment.
Fixed-term contract limitation
Canadian employment law is founded on the principle of freedom of contract, which doesn’t limit the duration of fixed-term contracts; however, the law does stipulate some regulations on the form the contracts must take. For instance, the courts often conclude that employment becomes an indefinite contract if the fixed-term contract is renewed multiple times or if the employee continues to work after the end date specified in the contract. Fixed-term contracts must also have a valid termination clause to be cancelled before their maturity date, without a party owing the balance due to the cancellation.
What makes someone an employee
Canadian courts apply a legal test on a case-by-case basis when analysing whether an individual is an independent contractor or an employee. The test comprises two steps:
- Analysing the written agreement between the parties and their intentions.
- Evaluating whether the following factors are consistent with the type of contract:
- Control – Is the worker under the direction and control regarding the time, place, and manner in which the work is performed? Is the worker hired, given instruction, supervised, controlled, or subject to discipline? Does the worker set his or her own hours and complete work independently? Can the worker hire subcontractors to complete the work? Arrangements whereby the worker is given greater flexibility over how and when the work is performed, tend to suggest an independent contractor relationship.
- Ownership of tools – To complete the work, does the worker use (1) tools, space, supplies, or equipment provided by the company or (2) their own resources? Arrangements whereby the worker supplies his or her own highly specialized and/or expensive equipment, may suggest a non-employment relationship. Arrangements whereby the company supplies most of the resources, may suggest an employment relationship.
- Chance of profit – Can the worker increase their earnings by using entrepreneurial skills? Is the worker paid an hourly rate, which limits their chance of profit, or are they paid piecemeal, meaning that greater efficiency may increase profits? Arrangements whereby a worker’s skills, efficiency, or entrepreneurial work can increase the worker’s earnings, tend to suggest an independent contractor relationship.
- Risk of loss – Is the worker at risk of losing money if the cost of doing a job is more than the price charged for it? Is the worker at risk of not being paid if the work is not done correctly? Arrangements whereby workers are at a greater risk of loss when performing services may favour a finding of a non-employment relationship.
These four factors above constitute a non-exhaustive list, and there is no set formula for their application. The relative weight of each factor depends on the particular facts and circumstances of each case. Two other factors are (1) the degree of economic independence in the employment relationship and (2) the duration of such relationship between the worker and the company.
Employee vs contractor
There are many differences in the rights and duties of employees and contractors — from taxation to termination.
Taxation
Employees are taxed on their income, as detailed under
Employee Contributions, which is higher than the contractor’s taxes. However, employees’ tax deductions and payments to the tax authorities and other programs, such as the Employment Insurance (EI) and the Canada Pension Plan (CPP), are handled by their employers, eliminating the risk of potential liabilities related to these payments.
On the other hand, contractors benefit from more advantageous tax breaks but need to handle the payment of taxes themselves. EI and CPP are optional programs. Contractors can opt-in and pay for them. Contractors can also write off various business expenses, such as Internet connection, equipment, phone, utilities, housing rental fees, meals, and transportation.
Benefit entitlement
Employees benefit from the protection of employment standards legislation and are entitled to paid time off and various other leaves, such as pregnancy, parental, and/or sick and family medical leaves. (Some leaves are partially or fully paid; others are unpaid. For more information, go to the Leaves section.) Although providing medical benefits isn’t mandatory, most companies include it as part of their remuneration plans. Still, extending such benefits to contractors is unlikely. Employees benefit from increased protection when it comes to applying for EI benefits if they become unemployed. Employees have the right to unionize, while contractors are not eligible to participate in the collective bargaining regime.
Since contractors are not required to join the EI or CPP, those who don’t contribute to the plans don’t qualify to receive benefits such as income protection for a period where they don’t have work or a pension. Moreover, contractors aren’t entitled to the basic protections of employment, such as any sort of paid leave that applies to employees. Workplace safety and insurance regimes often don\\\'t extend to contractors in the event of a work-related accident, which may include loss-of-earnings payments, medical treatment coverage, and even retraining for a new career. However, some provinces/territories do offer optional insurance for contractors.
Termination protection
The key distinction when it comes to the termination of the relationship with an employee or a contractor is the entitlement to notice. Contractors aren’t entitled to notice unless their contracts contain provisions that stipulate some form of notice, whereas employees are entitled to the statutory minimum requirements for notice and, depending on the province/territory, severance pay.
Penalties for Misclassification in Canada
Penalties for misclassification depend on jurisdiction but often trigger a variety of statutory rights and benefits such as minimum wage, overtime, paid vacation, pension and employment insurance contribution. Moreover, an individual who has been found to be an employee may be entitled to damages for wrongful dismissal, by the courts, including notice and severance pay. The back payments can also include interest charge.
The employer may also be liable for the deductions that should have been made from the worker’s income if the worker is unable to pay them or cannot be located.
