What is the Difference between an Employee and an Independent Contractor?

Although a business has the freedom to choose between hiring an individual as an employee or as an independent contractor, the rules applicable to the parties will differ depending on the type of relationship. It is important to identify the differences and the consequences of each type of relationship; wrongly qualifying a relationship may be very costly for the parties. Furthermore, although the contract between the parties may help determine the intent of the relationship between the parties, it is not in itself conclusive in determining whether an individual is an employee or an independent contractor. Thus, if an individual is misclassified as an independent contractor, a judge may still determine that a Services Agreement is, in fact, an Employment Agreement.

Independent Contractor

An independent contractor is someone who works for themselves and not for an employer; their work is submitted to a Services Agreement rather than to an Employment Agreement. Therefore, the independent contractor carries out his or her work in exchange for which the client commits to paying an agreed-upon price.

An independent contractor may also be designated as self-employed or as a self-employed worker or contractor.

Employee

On the other hand, an employee is a person who works on behalf of his employer and whose work is subject to an Employment Agreement.

Criteria for determining the status of a worker

A written agreement between a worker and an employer or client is not sufficient to determine the status of the worker. Thus, regardless of the words used in a contract between a worker and an employer or a client, the status of the worker will be determined by the type of relationship that exists between the worker and the employer or the client. Indeed, a worker may be party to a company contract such as a service contract, but be an employee in fact.

In order to determine the status of a worker, provinces and territories have established legal and common law tests specific to their jurisdiction. However, the following factors may help in determining the status of an individual:

direction and control;
ownership of facilities, supplies tools and equipment;
opportunity of profit or risk of loss;
the integration of the work done.

1. Direction and Control

Determining who decides when and how the work is done can help in assessing whether an individual is an employee or an independent contractor.

In the case of an employee, he or she:

receives an hourly, weekly or monthly wage or is paid on commission;
receives pay-related documents such as a paycheque and a statement of earnings;
usually works hours that are set by the employer;
receives benefits (vacation pay, Employment Insurance and Canada Pension Plan; benefits are paid in full or in part by the employer);
usually devoted all working time to one employer;
must perform the work and cannot hire someone else to do it
works under the direction and control of the employer
works under the supervision of the employer;
must generally follow the employer's instructions on how, when and where the work is performed;
must generally follow the employer's instructions regarding the quality or volume of work
may perform a variety of tasks and duties (and the relationship with the employer continues after these tasks and duties have been completed).

In the case of an independent contractor, he or she:

submits invoices;
receives pay as a lump sum or in instalments;
is generally free to choose hours worked;
may pay insurance premiums for privately held benefit plans;
in most cases, does not participate in the Employment Insurance program;
has typically many potential incomes streams and serves a number of payers;
may employ or subcontract others to do the work;
may have to meet deadlines, but can set the schedule, sequence or manner in which the work is done;
generally works without supervision to meet the requirements of the contract;
does not receive or follow instructions on when, where and how to work;
decides what methods are used to achieve the final outcome;
supplies a product or service as required by the contract and once these requirements have been met, the contractual relationship ends.

2. Ownership of Facilities, Supplies, Tools and Equipment

Determining the ownership of the tools that are needed to perform the job can also help to determine the status of a worker as an independent contractor or as an employee.

In the case of an employee, the person usually works with the tools provided by his or her employer. It is the latter who pays the costs of use.

In the case of an independent contractor, it is normally self-employment that provides the tools it needs to do the work.

3. Opportunity of Profit and Risk of Loss

The employment status may also depend on who takes the profit or loss from the business.

In the case of an employee, the costs of running a business are covered by the employer and the employee is not liable for the employer's debts. The employee will generally not encounter opportunity of profit or risk of loss.

In the case of an independent contractor, there is some level of financial risk and more opportunity for profit.

4. Integration of work done

The criterion of the integration of the works is to be considered from the point of view of the worker.

In the case of an employee, the work done will be an integral part of an employer's business.

In the case of an independent contractor, will be less integrated with the client's business.

The importance of the distinction between an employee and an independent contractor

The distinction between the status of self-employed worker and employee is fundamental; an incorrect qualification of a worker's status can have significant consequences for the worker as well as for the employer.

1. Labor standards do not apply to an independent contractor

In all provinces and territories, work is regulated through laws, which aims to protect employees by imposing minimum working conditions. The laws of the provinces and territories usually establish basic rules concerning the following subjects:

the minimum salary;
the duration of a normal work week;
the breaks;
holidays;
sick leave;
leave for family reasons (marriage, birth, adoption, death, etc.);
dismissals and penalties;
termination of employment (notice of termination of employment and dismissal);
psychological harassment;
child labor; and
expenses related to clothing, equipment, travel and training.

As these standards apply only to employees, an independent contractor does not benefit from minimum labor standards. Therefore, it is the responsibility of the independent contractor to negotiate an income that suits him when he or she accepts a contract.

2. The notice period provided for in the provincial and territorial laws applies only to an employee

The notice period is the period notice given by the employer to the employee when an employer terminates his relationship with an employee. The provincial and territorial laws regarding labour standards grant only the employee who is party to an employment contract the right to the notice period and any related indemnity.

3. The independent contractor is usually not covered under a provincial or territorial worker's compensation board

Independent contractors are not covered by a provincial or territorial worker's compensation board such as the Workplace and Safety Insurance Board in Ontario.

4. The status of an individual may be reviewed retroactively

The various administrative and governmental bodies, including revenue agencies, any provincial or territorial worker's compensation board and Canada Employment Insurance Commission may retroactively revise the status of an individual.

Retroactive revision of an individual's status means that the revision may be applied to previous decisions of the governmental or administrative authority.

This retroactive review can have serious consequences for the employer, such as retroactive vacation pay, overtime pay and termination pay.

Provincial and Territorial Regulations on the Distinctions Between Employees and Independent Contractors

Alberta: Employment Standards Code (RSA 2000, Chapter E-09)

British Columbia: Employment Standards Act (RSBC, c 113)

Manitoba: Employment Standards Code (CCSM, c E110)
The government of Manitoba has published a fact sheet where more information on the distinction between employee and independent contractor may be found.

Northwest Territories: Employment Standards Act (SNWT 2008, c 13)

Nova Scotia: Labour Standards Code (RSNS, 1989, c 246)
The government of Nova Scotia has a webpage where more information on the distinction between employee and independent contractor may be found.

Nunavut: Labour Standards Act (RSNWT (Nu) 1988, c L-1)

Ontario: Employment Standards Act (SO 2000, c 41)
The government of Ontario has a webpage where more information on the distinction between employee and independent contractor may be found.

New Brunswick: Employment Standards Act (SNB, c E-7.2)
The government of New Brunswick published a discussion paper where more information on the distinction between employee and independent contractor may be found.

Saskatchewan: Saskatchewan Employment Act (SS, S-15.1)
The government of Saskatchewan has a webpage where more information on the distinction between employee and independent contractor may be found.

Yukon: Employment Standards Act (RSY 2002, c 72)
The government of Yukon published a FAQ document where more information on the distinction between employee and independent contractor may be found.