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

Hiring an independent contractor versus an employee can have a large fiscal impact on a business. In fact, many businesses will commonly shy away from forming an employer-employee relationship with their workers in order to benefit from the advantages of having a worker characterized as an independent contractor.

The model itself is simple. The business will typically recommend the worker to incorporate a business and to offer their services to the business through their corporation. The independent contractor’s corporation will then invoice the business for services rendered. Mainly and most importantly, this allows the business to not have to make payroll deductions to the worker and on the other end, the worker will reap certain tax benefits.

However, simply being incorporated is insufficient to prove a business-independent contractor relationship. In fact, several other factors are considered by the courts to determine if a worker should be deemed an employee or an independent contractor. Principally, the courts will examine the degree of subordination that exists between the independent contractor and the business.

Additionally, the courts will use the following criteria that is established by the Canada Revenue Agency to determine the nature of the relationship, namely:

• Subordination
• Financial Liability
• Ownership of Tools
• Degree to which the worker’s services are integral to the activities of the business
• If the services end up achieving a specific result
• The agreement between the business and the worker

1. Subordination

This criterion is the most important factor in determining if a worker is an independent contractor or an employee. In determining the degree of control, the courts will typically ask the following questions:

1. Can the business decide on the manner that the work is conducted?
2. Does the business set a schedule and decide the place of work?
3. Does the business have the right to hire or fire?
4. Does the business establish the installments and amounts paid?
5. Does the business supervise the work conducted?
6. Does the business set a deadline?
7. Does the business manage the worker’s activities or that of the substitute?
8. Can the business take disciplinary action against the worker?

If the majority of the answers to these questions are “yes”, then there is subordination to an employer and therefore an employer-employee relationship.

Whereas, if the majority of the answers to these questions are “no” then there is most likely a business-independent contractor relationship. As such, the independent contractor is not a subordinate to the employer and has control over the time, place and manner that their work will be conducted, among many other factors.

2. Financial Liability

The second determinant factor is that of financial liability. In determining who is liable financially, the courts will typically ask the following questions:

1. Does the business cover the costs related to debts or loss?
2. Does the business assume the expenses generated by the worker’s services?
3. Does the business reap the profits of the services rendered by the worker?
4. Does the business cover the operating costs of the worker?
5. Does the business cover the maintenance costs of the worker’s tools and equipment?

If the answers to these questions are “yes”, then there is most likely an employer-employee relationship between the parties and it is employer who incurs the losses and earns the profits.

On the other hand, if the answers to these questions are “no”, then it is in fact the independent contractor who risks loss and reaps the gains of his work.

3. Ownership of Tools

The third criterion requires determining who owns and supplies the tools and equipment used to render the services.

If there is an independent contractor-business relationship, then it is the independent contractor that supplies their own tools and covers any maintenance or operating costs related. For instance, if a business hires an IT specialist to conduct a service for them and the IT specialist uses their own desktop or laptop computer, then this can be indicative of an independent contractor-business relationship.

On the other hand, if the worker uses the tools and equipment supplied by the business, then there is most likely an employer-employee relationship. For instance, if the worker is provided a computer to conduct their services, then there may be an employer-employee relationship.

4. Degree to which the worker’s services are integral to the activities of the business

The fourth criterion is the degree to which the services provided by the worker are integral to the activities of the business. In these cases, we must analyze the scenario at hand, for instance:

1. If a business hires a consultant for a service that is not part of the business’ usual activities, then it is most likely an independent contractor
2. If a business hires a worker for an activity that is integral to the business, then it is most likely an employee
3. If the worker is earning their income from only one business, then it is most likely an employee
4. If the worker has several clients and does not offer services to only one business, then it is most likely an independent contractor

5. If the services end up achieving a specific result

The fifth criterion establishes if the worker is retained to achieve a specific result. In most cases, when dealing with an independent contractor, the contractor is hired for a specific period of time for a specific project. Once the project is completed, then the service and thus the relationship has ended.

On the other side of the spectrum, should the worker service the business for an indefinite time period with no specific result to achieve, then the worker is most likely an employee.

 6. The agreement between the business and the worker

Finally, at the end of the day, the contract or verbal agreement that was concluded between the parties will always be examined. In this case, the material conduct of the parties will be taken into account.

It is important to note that at this stage, the written mention of an independent contractor agreement as a title of a contract does not suffice to prove an independent contractor-business relationship. The court will always examine the actual relationship between the parties using the factors above, the written clauses of the contract, the conduct of the parties and their behavior during the length of the relationship.

Thus, for any fiscal authority, the nature of the relationship between the parties will be a question of fact and not of textual definition.

To conclude, if a business wants to hire an independent contractor versus an employee, they must take into account these factors when making their decision. Should they want a significant level of control over the worker then that worker can be considered an employee even if that was not the intention of the parties. In all cases, to ensure that the relationship between the parties is established in a precise fashion, it is primordial for the parties to have a written agreement drafted by a professional evidencing that relationship.

For more information on independent contractor agreements, you can visit our page here. For more information on employment agreements, you can visit our page here.