Employee or Independent Contractor? How to Classify Employees

  • Employer advice
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Olivia Cicchini

Olivia Cicchini, Employment Law Expert

(Last updated )

Are you an employer of both employees and contractors?

Unlike independent contractors, employees or roles similar to those of employees (i.e., their services are under the company’s control, among other factors) are covered by the applicable employment standards legislation.

Any misclassification of employees as independent contractors could lead to employee claims for unpaid wages, termination notice or pay in-lieu, vacation pay, and other employee entitlements under the applicable employment standards legislation.

In this blog, we will explore the differences between an employee and an independent contractor in Canada, and help you determine how to classify your workers appropriately.

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

An employee is someone who works for an employer and is subject to their direction and control. An employee typically works on a regular basis, and the employer is responsible for deducting and remitting taxes from their pay cheque. Employees are also entitled to certain benefits under employment standards legislation, such as vacation pay, statutory holidays and notice of termination.

An independent contractor, on the other hand, is someone who provides services to a business, but operates independently and is not under the employer’s direction or control. Independent contractors typically have their own tools, equipment, and work schedule, and are responsible for paying their own taxes. They may also work for multiple clients simultaneously, but are not entitled to the same employment standards protections as employees.

5 tips to help classify a worker

There are five main differences to classifying your staff or rather, any individual who provides services to your company.

What defines an employee?

An employee is defined as someone who:

  1. Is provided with tools, equipment, uniform or materials to perform their work;
  2. Cannot subcontract their work;
  3. Is told by their employer not only what to do, but how to do it; and,
  4. You set the terms of employment for, such as job duties, pay, vacation, deadlines, and location.

What defines an independent contractor?

An independent contractor is defined as someone who, when working for you:

  1. Owns and is responsible for all or some of the tools or equipment they use to complete their work;
  2. Can subcontract some of their work;
  3. Is in business for themselves and can turn a profit or lose money from their work; and,
  4. Can have their contract for services ended by you with no requirement to provide notice of termination or pay in-lieu

It is important to note that while you can terminate an independent contractor’s agreement with no notice of termination, you cannot discipline them.

4 common misconceptions when classifying a worker

Employers often have misconceptions about how to differentiate between employees and independent contractors. It’s crucial that you understand the key factors that determine worker classification to avoid misclassifying your workers and the potential legal consequences that come with it. Here are some common misconceptions that many believe classify a worker as an independent contractor but actually don’t.

  1. A worker can still be classified as an employee even if they make a formal agreement, whether it’s verbal or written, to work as an independent contractor.
  2. Submitting invoices and/or charging HST does not necessarily make a worker an independent contractor.
  3. A worker using their own vehicle for work purposes doesn’t automatically make a worker an independent contractor.
  4. Deducting CPP, EI, or taxes from their pay does not necessarily mean that the worker is an independent contractor.

What are the consequences of misclassifying a worker?

In addition to financial penalties, misclassification can also result in legal disputes with the worker, who may seek compensation for lost benefits or unpaid wages. It can also damage your company’s reputation and result in negative publicity.

It is essential that you properly classify your workers from the beginning to avoid these consequences. This means understanding the factors that determine worker classification, and making sure that your workers meet the criteria for either an employee or an independent contractor.

What are best practices for classifying workers?

To ensure that you are properly classifying your workers, consider the following best practices:

Review all job positions

Take a closer look at each job position within your company and determine whether it is appropriate for an employee or independent contractor.

Consult with an expert

Consider seeking the advice of a legal professional who can help you determine the appropriate classification for each worker.

Provide clear contracts

Make sure that your contracts clearly outline the nature of the working relationship and the responsibilities of each party.

Monitor the working relationship

Keep track of how your workers are performing their duties, and make sure that they are meeting the criteria for their respective classification.

Stay up-to-date

Keep up-to-date with changes to employment law in Canada to ensure that you are complying with all regulations.

Need help classifying employees and independent contractors?

Properly classifying your workers as either employees or independent contractors is crucial for your business. Misclassification can result in financial penalties, legal disputes, and damage to your company’s reputation. It is important to understand the factors that determine worker classification and to make sure that your workers meet the criteria for their respective classifications.

If you think you’re misclassifying a worker as an independent contractor instead of an employee, it’s always best to ask for HR advice. Peninsula’s services allow you to receive quality advice on any employment issues you may have. Contact us at 1 (833) 247-3652 to speak with one of our experts today.

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