Who Dat? The Distinction Between Contractors and Employees and Why it Matters

Before a start-up hires its first worker, it should consider how to structure the working relationship to maximize the available benefits and minimize the risk of liability to the business.  We have set out below a few key hiring considerations.

What’s the Difference Between a Contractor and an Employee?

Below is a basic overview of the distinction between the two main types of workers:

There is also a third category of worker called a dependent contractor that resembles an independent contractor but is an exclusive service provider, which is a hallmark of being an employee.

Why is the distinction important?

CRA and the courts will look at the true nature of the relationship, rather than what the parties have called it, to determine whether a worker is a contractor or an employee.  If the relationship is mischaracterized, a business may suffer costly consequences.

For example, a court or government agency (including the CRA) may examine a relationship between a business and one of its independent contractors, and if the relationship is truly that of employer-employee (notwithstanding what the parties intended), there may be unintended consequences, such as:

• The worker will be entitled to certain minimum rights pursuant to the applicable employment standards legislation, including with respect to vacation pay, overtime pay and restrictions on hours of work.  The worker could make a claim to the Ministry of Labour or a court and obtain an order for the business to pay these wages or comply with these obligations.
• Moreover, an employee is entitled to notice or pay in lieu of notice and additional payments upon termination.  If there is no written agreement that limits the amount of notice and other entitlements upon termination, the business may be required to provide a significant payout following a termination.
• Employers must remit premiums (including EI, CPP and EHT) on behalf of its employees.  CRA may order an employer to pay retroactive remittances and impose a fine for failing to remit on behalf of a worker.

Take-Home for Businesses

Before a worker is hired, start-up businesses should:

• consider the type of relationship the business wishes to have with a worker;
• set out that relationship in a written employment or contractor agreement; and
• act in accordance with the terms of that agreement.

Jennifer Heath, Employment Lawyer, Rubin Thomlinson LLP, Toronto, ON