In the Canadian talent market, correctly classifying workers as either employees or contractors is a critical responsibility for employers. However, the distinction between these two categories is not always clear-cut, leading to potential misclassification and significant legal/financial repercussions for businesses.

The stakes are particularly high in Ontario, where the Employment Standards Act, 2000 (ESA) was amended in November 2017 to introduce criminal prosecution for employers who misclassify their workers under certain circumstances. Employers found guilty of violating the ESA could face fines ranging from $50,000 to $500,000.

To help you avoid all legal, and financial hassle we've written this guide for employers in Canada to navigate the complexities of worker classification. We will explore the key factors that distinguish employees from contractors and best practices for ensuring compliance with employment standards. By understanding and adhering to these guidelines, employers can foster a fair and compliant workplace while minimizing the risk of costly legal disputes.

What is an Employee in Canada?

In Canada, an employee is a worker who is employed by an employer to perform work in return for wages or a salary. The determination of whether a worker is an employee is based on several factors that collectively define the nature of the working relationship. Some key characteristics of an employee in Canada include:

1. Control: An employer typically exercises a significant degree of control over an employee's work, including how, when, and where the work is performed.
2. Integration: An employee is usually integral to the employer's business and works under the direction and control of the employer.
3. Tools and equipment: In most cases, an employer provides the tools, equipment, and materials necessary for an employee to perform their work.
4. Financial risk: Employees generally do not bear any financial risk, as they are not responsible for the profits or losses of the business.
5. Opportunity for profit: Employees typically do not have the opportunity to earn profits beyond their regular wages or salary.
6. Exclusivity: Employees often work exclusively for one employer and are not free to offer their services to others without permission.
7. Termination: An employer generally has the right to terminate an employee's employment, subject to applicable employment laws and any contractual provisions.

Employees in Canada are entitled to various statutory rights and protections under federal and provincial employment laws, such as minimum wage, overtime pay, vacation pay, and employment insurance benefits. Employers are responsible for withholding and remitting income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums on behalf of their employees.

What is a Contractor in Canada?

In Canada, a contractor, also known as an independent contractor or self-employed individual, is a worker who provides services to a client or company without being classified as an employee. Contractors are typically hired to complete specific tasks or projects and have greater autonomy over their work compared to employees. Some key characteristics of a contractor in Canada include:

1. Independence: Contractors have significant control over how they perform their work, set their own hours, and determine the methods and tools they use.
2. Limited integration: A contractor's work is usually not integral to the day-to-day operations of the client's business, and they are not subject to the same level of control and supervision as employees.
3. Tools and equipment: Contractors often provide their own tools, equipment, and materials necessary to complete the work.
4. Financial risk: Contractors bear the financial risk associated with their work, as they are responsible for their own profits or losses and may need to rectify defective work at their own expense.
5. Opportunity for profit: Contractors have the ability to earn profits beyond what would be considered a regular wage or salary, depending on their efficiency and performance.
6. Nonexclusivity: Contractors are generally free to offer their services to multiple clients simultaneously and are not committed to working exclusively for one client.
7. Termination: The working relationship between a contractor and a client is typically governed by a contract that outlines the terms and conditions of the engagement, including provisions for termination.

Contractors in Canada are responsible for managing their own taxes, including income tax, Canada Pension Plan (CPP) contributions, and, in some cases, Goods and Services Tax (GST) or Harmonized Sales Tax (HST). They are not entitled to the same statutory benefits, worker's compensation, and protections as employees, such as minimum wage, overtime pay, and employment insurance benefits.

How to Classify Your Workers in Canada

When it comes to classifying a worker as an employee or an independent contractor, there's no single, universal test that applies in all situations. However, Canadian courts have often relied on a key question to guide their decisions. These are categorized into different types of 'tests.'

Control Test

The Control Test evaluates the degree of control the employer has over the worker’s activities and methods of work.

Key questions to ask:

• How much control does the employer have over the worker?
• Does the employer dictate how, when, and where the work is done?
• Can the worker hire others to complete the work?

Decision:

• High Control: If the employer has significant control over the worker’s tasks, schedules, and methods, the worker is likely an employee.
• Low Control: If the worker has autonomy in how they complete their tasks, they are more likely an independent contractor.

For example, a customer service representative at a BPO who works fixed shifts, follows a script provided by the company, and is monitored by a supervisor is an employee. Whereas a web developer hired by a tech startup to build a website, who sets their own hours and decides on the development approach is a contractor.

The Four-fold Test

The Fourfold Test, also known as the Entrepreneur Test, looks at a combination of four factors to determine the nature of the working relationship.

Key factors:

1. Control: Similar to the Control Test, it examines the degree of control the employer has over the worker.
2. Ownership of Tools: Who provides the tools and equipment needed for the job?
3. Chance of Profit: Does the worker have the opportunity to make a profit based on their efficiency and decisions?
4. Risk of Loss: Does the worker bear financial risk for their work?

Decision:

• Employee: If the employer controls the work, provides the tools, and the worker has no chance of profit or risk of loss, the worker is likely an employee.
• Independent Contractor: If the worker controls their work, provides their own tools, and has the potential for profit and risk of loss, they are likely an independent contractor.

For example, a digital marketing specialist at an agency who uses company-provided software, receives a fixed salary, and has no financial risk or opportunity for profit beyond their salary. On the other hand, a social media expert hired by a startup to manage campaigns, who uses their own tools, can take on multiple clients and bears the risk of underperforming campaigns is a contractor.

Integration Test

The Integration Test assesses how integrated the worker is into the employer’s business operations.

Key questions:

• Is the worker’s service an integral part of the business?
• Is the work done on behalf of the business but not integrated into it?

Decision:

• Highly Integrated: If the worker’s tasks are essential to the business and they follow company policies, they are likely an employee.
• Less Integrated: If the worker’s tasks are peripheral and they operate independently, they are more likely an independent contractor.

For example, a business analyst at a consulting firm who works on client projects on-site, follows the firm's processes, and is crucial to delivering client engagements is an employee. Whereas, a virtual assistant hired by a small business owner for administrative tasks, working remotely with their own equipment and methods, separate from the company's core operations is a contractor.

Hire and Pay Contractors and Employees in Canada With Thera

To ensure compliance and avoid risks, businesses must stay up-to-date with the ever-evolving labor laws and regulations in the regions where they operate. This process can be time-consuming, resource-intensive, and prone to errors, especially for companies with a globally distributed workforce.

Fortunately, there are solutions available to streamline this process and alleviate the burden of managing a global workforce while ensuring full compliance with local laws. One such tool is — Thera, an all-in-one payments platform to hire, pay, and manage your talent seamlessly while being fully compliant with local laws and regulations.

With Thera, you can:

• Pay your contractors and employees in over 150 countries using five different payout methods.
• Automated payroll ensures you never miss a deadline, with experts available for any questions.
• Manage your entire workforce, including contractors, employees (W2), and EOR staff, all on one platform.
• Ge the most competitive pricing in the market.

By choosing Thera, you can quickly and compliantly build your global team while streamlining operations and reducing costs. Book a demo today to experience the convenience of managing your entire workforce through a single, powerful platform.

‍