With the increasing popularity of remote work and the gig economy, many employers around the world are wondering whether to hire independent contractors or employees to perform valuable services.
Independent contractors vs employees in Canada are different, and employers will need to understand the rules and regulations surrounding both options. For example, employees are entitled to certain benefits that an independent contractor is not.
However, an independent contractor has greater flexibility when it comes to employment relationships in Canada. Additionally, contractors will need to register themselves as a business, among other important tasks.
Hiring independent contractors allows companies greater flexibility, but there are certain risks that must be considered. For example, companies that misclassify employees as independent contractors can face steep penalties and potential reputational damage.
Wondering where to start? This guide will tell you everything you need to know to confidently hire independent contractors and employees in Canada.
Employment Relationships in Canada
Companies that are looking into hiring Canadian independent contractors or employees will need to understand what an employment relationship in Canada is.
An employment relationship in Canada is the legal agreement between employers and employees and defines the necessary obligations for both parties. The agreement commences when a person agrees to perform work or provide services under certain conditions in exchange for compensation.
Employment agreements also help ensure that workers and employees receive any statutory benefits or rights they are entitled to. These formal agreements also define other aspects of the working relationship, such as wages, time off, benefits, details of the position, and more.
What is an Employee in Canada
It’s important to understand the key differences between a contractor vs an employee in Canada to avoid noncompliance penalties or other legal risks. Employees and independent contractors in Canada are classified differently, meaning employers will have different rights or responsibilities throughout the employment relationship.
Employees are typically hired on a permanent basis and tend to perform work exclusively for one company in exchange for remuneration. There are various federal and provincial laws that apply to these types of full-time employees. These kinds of permanent workers are entitled to various forms of government and employer benefits. Generally, the employer or company provides all the required tools needed to perform the service.
Employees in Canada also receive more robust protections against termination. For example, employees who have passed the probationary period can only be let go for specific reasons and must receive a minimum notice period prior to dismissal.
Additionally, the employer is responsible for handling all the necessary payroll deductions and social security contributions on behalf of each employee.
What Benefits Do Employees in Canada Get?
Canadian employees are entitled to statutory benefits. Employee benefits are one of the major costs a company must consider when choosing to hire an employee or independent contractor in Canada.
There are various benefits and responsibilities that must be provided to each permanent worker.
Wages
Employers in Canada will need to ensure that all employees receive the mandated minimum wage to stay out of trouble. In 2023, the federal minimum wage is $16.65 per hour, though the minimum wage can vary depending on the province.
Overtime
Employees who work more than eight hours per day or 40 hours per week qualify for overtime pay. Canadian employees who work overtime are entitled to:
- At least 1.5x their regular hourly wage.
- Time off with pay, which is equal to 1.5 hours of time off for every hour the individual worked.
Employees also have the right to refuse overtime to carry out personal and family responsibilities.
Payroll Deductions
Employers are responsible for handling payroll and withholding the appropriate amount from each employee’s paycheck. This will help to ensure that all parties are compliant, especially when it comes to the Canada Revenue Agency (CRA).
Employers will need to deduct:
- 2.28% of an employee’s paycheck for Employment Insurance
- 5.95% towards Canada Pension Plan contributions
Companies hiring Canadian workers will also need to handle all income tax requirements for business income purposes.
Canadian income taxes are determined on a progressive scale. The current tax brackets are:
- 15%: incomes up to $53,359
- 20.5%: incomes up to $106,717
- 26%: incomes up to $165,430
- 29%: incomes up to $235,675
- 33%: incomes over $235,675
Termination
Permanent employees also have protections against termination, which isn’t the case when hiring independent contractors in Canada. Even those with a good employer-employee relationship should take the extra steps to ensure that all rules and regulations are followed during this process.
Employers must provide at least two weeks’ notice when dismissing an employee who has worked for more than three months, or provide payment in lieu of notice. Employees can only be terminated for valid reasons, such as misconduct like theft or mutual agreement.
Employees who have worked for the same company for at least one consecutive year are also entitled to severance pay. The required amount is equal to two days of their regular pay for each full year of employment.
The probationary period for Canadian employees is typically around three months. During this time, either party can end the employment agreement without facing penalties.
If you are unsure at any time in this process, be sure to check your local labor laws or Canadian employment law. Whether you manage an independent contractor, self-employed worker or employee, it's imperative that you take additional steps to ensure that all parties are protected.
Time Off
Canadian employees also receive various forms of leave entitlement throughout the year. This includes ten days of paid vacation, up to 15 weeks of maternity leave, up to 40 weeks of parental leave, and up to 17 weeks of sick leave. Aboriginal employees are entitled to five additional unpaid days off to attend cultural rituals and events.
Canada also has five public holidays that employers will need to be aware of, but the actual number of civic holidays can vary between provinces.
What is an Independent Contractor in Canada?
Independent contractors in Canada are considered an entirely different class of workers. A contractor is a worker who is hired to complete a specific project or work for a pre-determined period of time.
In contrast to employees, Canadian independent contractors have greater flexibility over when and where they work, meaning they control their working hours. Self-employed workers also have greater freedom and can work for multiple employers or clients simultaneously, as long as they fulfill the terms of employment.
In most cases, the independent contractor also owns all the required tools to complete the project or task.
Additionally, independent contractors also take on a greater amount of financial risk throughout the agreement. Employees receive a regular bi-monthly paycheck, while contractors are responsible for submitting invoices to the client.
Canadian contractors are usually considered self-employed in the country and are similar to 1099 contractors in the United States.
What Benefits Are Independent Contractors Entitled To?
Independent contractors in Canada are not entitled to statutory benefits. This means a contractor will generally not receive paid time off or protection against termination. Employers are not required to provide severance pay after the employment agreement ends.
Independent contractors are also responsible for handling their own payroll deductions, including income tax and social security contributions.
What is a Dependent Contractor in Canada?
Employers may also need to understand a third worker category in Canada when hiring independent contractors. In certain cases, employers may need to engage a dependent contractor, which carries additional employment obligations and responsibilities for both parties.
This classification acts as a middle ground between Canadian independent contractors and employees.
A dependent contractor is similar to an independent contractor whereby neither category is considered permanent employees or entitled to statutory benefits.
Dependent contractors have enough autonomy and control to be classified as a contractor but are still significantly economically dependent on a particular business entity or client. These workers can still seek out jobs from other companies.
While dependent contractors are not entitled to benefits, they tend to receive more job security than independent contractors in Canada.
For example, dependent contractors must be given a reasonable notice period prior to the termination of the contractor relationship. If an employer does not provide proper notice, the dependent contractor may be able to take legal action.
Why is it Important to Understand the Difference?
Understanding the key differences between independent contractors vs employees in Canada is crucial when expanding your workforce. Employers will have different responsibilities with both parties, and failure to meet these obligations could result in severe penalties.
Knowing the difference between both can help prevent your company from accidentally misclassifying workers.
Misclassification
Sometimes, an employer may misclassify an employee. This may happen when an employer considers a worker to be an independent contractor in Canada instead of a regular employee. Companies may misclassify a worker accidentally, though some organizations knowingly misclassify individuals to avoid the required costs of hiring an employee in the country. In both cases, the employer is vulnerable to potential penalties.
Examples of misclassification include:
- When an employer doesn’t properly classify a driver as an employee when the driver is providing exclusive services to the employer and uses the company’s equipment or tools.
- When a worker has chosen or is required to set up a corporation and receive payment as a service provider instead of an employee.
- When an employer considers an employee an intern or student intern.
- When an employer classifies a worker as an officer or director of the company exclusively, even though the worker may be a director or associate and a permanent employee simultaneously.
Failure to classify employees and independent contractors in Canada properly can result in significant noncompliance punishments. Common penalties include back pay for any unpaid income tax or benefits owed, along with more serious sanctions such as hefty fines, reputational damage, and restrictions when hiring contractors in the future.
Noncompliant companies will also be informed about their legal responsibilities through guidance and counselling sessions after the first instance. If an employer has failed to correct their mistakes, they will receive a compliance order from the government, followed by an administrative monetary penalty for any continued errors.
Independent Contractor VS Employee: Canada Employers and How to Tell the Difference
When figuring out how to properly classify independent contractors and employees, there are several factors that companies will need to keep in mind. Generally, courts will examine certain circumstances, including:
- The level of influence the employer has over services provided by the worker.
- Whether the worker owns their own equipment or not.
- Whether the worker is able to hire assistants or helpers.
- The degree of financial risk that the worker is liable for.
- The worker’s opportunity for profit and the performance of any services rendered.
The Canadian government has also implemented a series of tests that can accurately determine a worker’s proper classification. This includes the integration test, which asks if the services provided by a contractor or employee are a vital part of the business’s operations or done for the business but aren’t fully integrated into the company.
It’s also important to consider other factors to avoid misclassifying employees as independent contractors in Canada. These include the exclusivity of the worker’s services, the length of the working relationship, and more.
Certain indicators might be used to determine the workers’ classification. For example, employees tend to have a subordinate relationship with the employer. The employer has the final word regarding business decisions, and the worker receives training and direction from the employer. Independent contractors tend to work alone and independently and can refuse work from the hiring party.
In Canada, companies or workers can request a ruling from the government if there’s any confusion about classification. Rulings can be requested online and must be done by June 29 of the following year after the issue arises. Additionally, companies will need to be aware of the differences in provincial employment laws in terms of classification.
Reasons to Hire Employees
Hiring employees instead of independent contractors in Canada can provide several advantages for a company. Employers will have significantly more control over all aspects of the employment agreement when hiring an employee. Companies will also be able to have greater influence during all stages of the onboarding and training process, which can help smoothly integrate new hires into your company culture.
Employees can also take on multiple roles simultaneously, providing your company with greater versatility. Additionally, employees may have greater loyalty to your company than an independent contractor.
Companies that choose to hire employees also have more protections regarding intellectual property rights. Lastly, hiring an employee eliminates the risk of misclassifying a company’s workers.
Reasons to Engage Independent Contractors
While hiring an employee can be beneficial, engaging an independent contractor in Canada also has many benefits and has become a more popular option with the rise of today's gig economy.
Recruiting independent contractors vs employees gives employers greater flexibility when it comes to work arrangements. Employers are not required to provide severance pay or other benefits to Canadian contractors, meaning companies can choose to engage contractors for specific projects without risk. After the agreement ends, the employer is not responsible for any additional costs or obligations.
Engaging with an independent contractor in Canada can also save a company a significant amount of money. Employers are not required to cover the necessary costs of hiring an employee in Canada, which include benefits, vacation, payroll deductions or withholdings, and more. This can also lead to reduced liability with local labor laws in many cases, such as the right to unjustified termination.
Canadian independent contractors also give businesses the opportunity to access a wider talent pool. This can help an organization remain competitive in the Canadian market and attract top-tier workers.
How Can Borderless Help?
Borderless is a global Employer of Record (EOR) that can help you compliantly hire employees and engage independent contractors in Canada. An employer of record will take care of all aspects of the hiring process and handle complicated matters such as payroll, benefits administration, termination, drafting legal employment contracts, and more.
An employer of record can also help ensure that every employee or contractor is classified correctly. An employer of record like Borderless has in-depth expertise about Canadian labor laws, which can help you remain compliant and ultimately spend more time focusing on managing your business.
Your EOR acts as the legal entity when hiring in Canada and can save you both time and money when expanding your team.
Why Borderless?
Borderless is an EOR platform with comprehensive knowledge of Canadian labor laws and regulations. With our help, you can legally hire employees and contractors without the risk of misclassification. Speak with our team today to see how we can help you grow your business in the Canadian market.
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
