Employee vs. Contractor

There is a growing trend in today’s workplace of hiring contractors rather than employees to perform necessary services.  This trend is a result of a number of factors, including greater flexibility, reduced overall costs and often a greater specialization that contractors bring to a project.  The distinction between the two is somewhat difficult to determine.  The distinction, however, has wide reaching implications for a company’s practices. An employee has certain rights on termination that generally are not available to contractors.  Additionally, an employer is under statutory obligations regarding withholding and remissions for income tax, workers’ compensation and employment insurance.  As well, employees have certain entitlements under the employment standards legislation, such as overtime pay, minimum wage and paid vacations, which are not available to contractors. Problems arise when companies have independent contractors providing services, but there are some aspects of the relationship that suggest or resemble a traditional employer/employee relationship. 

The following is a list of some of the factors that should be considered in determining whether an individual is an employee or an independent contractor.  No one factor is determinative.  For example, there could be one or more characteristics under the employee category and the independent contractor or vice versa. Courts and tribunals will consider the complete relationship between the company and the worker and each case will depend on its individual facts.   It is obvious from the chart that determining whether one is an employee or an independent contractor can only be done on a case by case basis.  Accordingly, it is important to seek proper advice when establishing an independent contractor relationship to help reduce the risk of the individual being found to be an employee.  It is also generally advisable that a contract be entered into between a company and an independent contractor in order to help distinguish the individual form the regular employees. 

Employee

Factors making individual more likely to be an employee

  • Company selects the individual who will provide the services
  • Individual is paid on a fixed hourly or monthly basis.
  • Company directs day-to-day work of individual.  Company controls the method and location of performing the work.  Individual is subject to direction of company’s manager.  Individual must comply with company’s general hours of work.  Company determines where, when and how the work will be performed.
  • Individual has employees of company assisting him or her
  • Company’s supervision disciplines or dismisses individuals and the individual’s helpers
  • Individual is covered by the employee group benefit plan
  • Individual does not have own GST number.
  • Company provides any necessary tools or equipment
  • Company completes “Record of Employment” for Human Resources Development Canada upon termination of relationship, Company completes T4’s.
  • Individual works full-time for company and does not work for anyone else.
  • There is an on-going relationship between the individual and the company with no definite end-date
  • There is no documentation suggesting anything other than an employment relationship
  • Individual is treated the same as all of the company’s employees.  Individual is subject to company’s policies governing employees
  • Individual is employed as part of the business and his or her work is an integral part of the business
  • The individual has previously worked as an employee for the company in the same capacity.

Independent Contractor

Factors making individual more likely to be an independent contractor.

  • Service is performed by an individual selected by the contractor.
  • Contractor receives lump sum payment for completed project or work upon submission of invoice. Contractor has a chance of profit from sound management and a risk of financial loss if the project does not go well.  Contractor carries on a business on its own behalf.
  • Contractor agrees to produce a specified result but it is up to the contractor to select the method to achieve that result. Contractor chooses own hours of work.
  • The contractor hires any helpers directly.
  • There is no discipline by the company.  Failure to produce necessary result is dealt with in accordance with the contract between the company and the contractor.
  • Contractor not provided any employee benefits.
  • Contractor has own GST number, charges company for GST and remits to Revenue Canada.
  • Contractor provides own tools and equipment. Project may require capital investment.
  • No Record of Employment or T4’s prepared since not an employment relationship.
  • Contractor works for a number of different clients.  The company does not restrict the contractor from working for others.
  • Relationship terminates upon completion of specified task.
  • There is a contract between the company and the contractor.
  • The contractor’s workers are not treated like the company’s employees.  They don’t attend the company’s employee meetings.
  • Contractor’s services are peripheral to company’s operation and are not integrated into it.
  • The contractor has never been an employee of the company.

Source: Jim Casey, Field Atkinson Perraton Barristers & Solicitors