Independent Contractor vs Employee: What's the Difference?

By Athina Iliadis

Sr. HR Consultant

How employers classify workers in Canada matters. There are differences between an independent contractor and an employee, and they are not arbitrary. There are certain definitions and guidelines set out by the Canada Revenue Agency (CRA) that all employers must abide by, or they could face financial penalties. 

In this blog, we’ll answer these common questions about the difference between an independent contractor and an employee:

• What is the difference between an independent contractor and an employee?
• How do employers determine if a worker is an independent contractor or an employee?
• Why is worker misclassification a compliance risk?
• What are the penalties for misclassifying an employee as an independent contractor?
• Common questions about the differences between employee and independent contractor classifications.

What is the difference between an independent contractor and an employee?

An employee works full-time or part-time for a company. An independent contractor works independently of an employer. The main difference comes down to the company's level of control and how workers are paid. Employees follow company direction, have taxes taken off their pay, and usually receive benefits. Independent contractors run their own businesses, decide how they do the work, handle their own taxes, and typically don’t receive benefits.

How do employers determine if a worker is an independent contractor or an employee?

There are several criteria used to determine whether a worker is an independent contractor or an employee. Here's a summary of the criteria and  differences outlined by theCRA: 

Employment Status: Employees typically work for a single employer, whereas contractors often work for multiple clients.

Level of Control: Employers dictate how and when work is performed for employees. Contractors generally have the autonomy to decide their own work processes and schedule.

Tools and Equipment: Employers usually provide and maintain all equipment for employees. Contractors own their tools and are responsible for all associated maintenance, insurance, and repair costs.

Subcontracting: Employees must perform the work   personally. Contractors have the right to hire assistants or subcontractors to complete the job.

Financial Risk: Employees carry no financial risk and are reimbursed for expenses. Contractors take on business risks, pay their own operating costs, and can suffer a financial loss if a project goes over budget.

Investment and Management: Unlike employees, contractors often make significant capital investments (like specialized machinery, tools, or office space) to provide their services.

Opportunity for Profit: Employees receive a set wage or salary regardless of company performance. Contractors can increase their profit through efficiency, negotiation, and cost management.

Benefits and Protections: Employees are entitled to company benefits (health, dental, pension) and statutory protections. Contractors are not and must fund their own insurance and retirement.

Why is worker misclassification a compliance risk?

Misclassifying workers in Canada could pose a risk of non-compliance with employment and taxation laws. You could violate federal and provincial employment standards, tax laws, and labour regulations. 

When a worker is incorrectly classified as an independent contractor rather than an employee, employers may fail to meet obligations related to:

•     CPP contributions
•     EI premiums
•     Income tax withholdings
•     Vacation pay
•     Statutory holidays
•     Overtime
•     Minimum wage

The CRA and provincial ministries of labour actively investigate misclassification. Findings can result in retroactive payroll taxes, penalties, interest, and reassessments going back several years. This could result in significant financial penalties if employers are found to be misclassifying workers.