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Human resource service knowledge article

Employee vs. Contractor: Be Sure You Know The Difference

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HR Governance

Those who provide their services to a company generally fall into two categories: employee or contractor. Each make up an important part of the workforce, but in truth they are very different – and misclassifying those who work for you can be very costly.

Employees and Contractors – Key Differences

In an employer/employee relationship, employers must deduct amounts from the employee’s pay for Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income taxes. In addition to the amounts deducted from the employer’s pay, employers must remit the employer portion of CPP and EI payments to the Canada Revenue Agency (CRA) as well. Wages or a salary are paid out to the employee on a regular, predetermined schedule.

Conversely, independent contractors are considered self-employed, and are responsible for their own deductions. Generally, independent contractors must invoice the company they are doing business with in order to receive payment.

Tips for determining the correct classification

There are several factors that are examined to determine whether a business relationship exists, or whether an employer/employee relationship has been misclassified. It is a very common mistake that we see across companies operating in different sectors and places, because there are so many ways to build your team and a lot of exceptions in the law. It really pays to get the right advice before making hiring mistakes that can become very costly to fix.

1) Ownership of Tools

In most cases, employees use tools (e.g. computers, hand tools, and other equipment) provided by the employer. In the case of an independent contractor, the contractor supplies the tools and is responsible for their cost, maintenance, and upkeep.

2) Freedom

In an employer-employee relationship, the employer generally has control over several aspects of the work and compensation, including where, when, and how the work is carried out. In a contractor relationship, the contractor determines how to carry out the work, and sets the hours during which the work will be completed.

3) Opportunity for profit

In an independent contractor situation, the contractor bears the opportunity for profit as well as the risk of running a loss. Contractors generally cover the operating costs of their business, whereas employers are responsible for the operating costs of the business in an employer-employee relationship.

The cost of mistakes

If it is determined that a worker is in fact an employee and has been misclassified as an independent contractor, there are repercussions for both parties. The contractor may be punished for the hiring error where they may have to pay back any business expenses that were deducted during their work arrangement, resulting in a balance owing to the CRA. Additionally, the employer will be responsible for unpaid taxes, CPP contributions and EI premiums, and may have additional penalties to pay. All of these consequences can have a devastating impact on future profitability. In 2018 a Domino’s Pizza franchise was ordered to pay a delivery driver over $28,000 in lost wages after it was found to have violated several parts of the Employment Standards Act with respect to the driver’s employment classification. Though the employee did win the legal battle, the case is ongoing and still unresolved causing continuous stress on both sides.

Here to Help

Would you like more information on how to correctly classify your workforce or do you have other HR–related questions? We can be reached for a free confidential consultation at +1-403-470-5350 or [email protected] 

For further details on how Honiva helps businesses build great HR programs, please view our service listing.

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Further Reading

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