Contractor vs Employee: Which is Better for Your Business in Canada?

Comparing Contractors vs. Employees

There are two distinct categories of workers: employees and independent contractors. Companies hire employees for long-term engagements. Whereas independent contractors fulfill specific tasks or projects, employees have regular duties. They also receive a salary or hourly wage, rather than a fixed fee or hourly rate.

Employees enjoy benefits such as minimum wage, overtime pay, and paid vacation, which independent contractors do not receive. Additionally, companies require employees to follow the company’s policies and procedures strictly. Independent contractors can operate more independently. Legal definitions consider employees as company personnel, while an independent contractor qualifies as self-employed.

Aspect	Employees	Independent Contractors
Hiring	Hired on a long-term basis	Hired for specific tasks/projects
Payment	Salary or hourly wage	Fixed fee for services, can have hourly rates
Entitlements	Minimum wage, overtime pay, paid vacation, etc.	No entitlements to benefits such as minimum wage, overtime pay, etc.
Company Policies	Subject to company’s policies	More independent
Legal Classification	Considered employees for legal purposes	Considered self-employed for legal purposes

Contractors

A contractor is a specialist or entity generally hired to perform a specific task or project. They can include Upwork freelancers, agencies, or individual service providers. Contractors typically have an agreement with the company outlining the scope of work, payment, and timelines.

Contractors work for themselves beyond the same employment laws as employees. This means contractors don’t qualify for minimum wage, overtime pay or paid vacation. Contractors are also less subject to the company’s policies and procedures.

There are many benefits to hiring contractors. Contractors can provide businesses with flexibility and expertise that may not be available in-house. They can also help companies to save money on labour costs. 

However, businesses face some risks when hiring contractors. Contractors may not be as reliable or committed to the project as employees. They may also be more likely to file lawsuits if injured on the job. Additionally, if a worker is misclassified as an independent contractor when they are an employee, the business could be subject to fines and penalties.

Employees

An employee is someone or entity that works for a longer term. Companies typically pay employees with an hourly wage or salary. Labour practices generally entitle employees to minimum wage, overtime pay, and paid vacation. Employees are also subject to the company’s policies and procedures.

An employee can offer many advantages. They can provide stability and a sense of commitment to the company. They can also help businesses to save money on labour costs in the long run. However, hiring an employee can come with some risks. Employees may be less flexible than independent contractors and may not have expertise in specific areas. It can also be more difficult to remove an employee due to labour laws. This is especially true for union members.

Critical Considerations of Contractors vs. Employees

Aspect	Employees	Independent Contractors
Tax Implications	– CPP/EI contributions deducted – Tax withheld from paycheques	– Responsible for paying income tax – May collect GST/HST
Cost of Hiring	Generally more expensive to hire	Generally less expensive to hire short-term
Workplace Benefits	Entitled to workplace benefits	Typically not entitled to benefits
Payment	Paid by cheque or direct deposit	Paid by invoice

Tax Implications

The tax implications differ for employees and contractors. Employers actively make CPP and EI contributions on behalf of their employees, while contractors are exempt from making EI contributions. Employers withhold taxes from employees’ paycheques while contractors file and pay their income taxes. Additionally, contractors may collect GST/HST on their goods and services.

Cost of Hiring

The cost of hiring a contractor or an employee can vary depending on several factors, including the type of work, the worker’s skills and experience, and the business’s location. Generally, contractors tend to be less expensive in the short term and more expensive in the long term.

While companies generally pay contractors a higher hourly rate than employees, they also don’t require training and supervision. Businesses expect contractors to complete tasks more quickly and efficiently than employees. Similarly, companies also don’t make CPP and EI contributions on behalf of contractors.

On the other hand, employees typically require more investment in benefits and training. However, in the long run, businesses may save money on wages by hiring and training employees instead of contractors. Bringing labour in-house allows a company to spread out costs that the contractor’s rate otherwise would include.

Workplace Benefits

Employers in Canada generally provide employees with several workplace benefits, such as private health insurance, dental insurance, and retirement savings plans. Contrary to this, contractors typically do not qualify for these benefits. This means that contractors must make their own arrangements for health insurance, retirement savings, and other benefits. However, a contractor can negotiate these benefits in their contract for services. 

Payment

Companies typically pay contractors by invoice. The contractor generally creates and submits an invoice to the company’s accounting department. Meanwhile, they pay employees by cheque or direct deposit.

Defining a Contractor vs. Employee (Outside of Quebec)

The Government of Canada has a set of factors businesses can use to determine whether a worker is an employee or an independent contractor. Multiple court rulings decided on these factors on the subject. Companies should consider all these factors before deciding who is an employee and an independent contractor. This is because there can be severe consequences for misclassifying a worker. 

Aspect	Employees	Independent Contractors
Control	Subject to the business’s direction and control and work methods	Typically free to set their hours and work methods
Tools and Equipment	Provided by the company	Responsible for their own
Subcontracting	Not allowed	Usually allowed
Financial Risk	Business bears the financial risk	Contractor bears the financial risk
Profit Motive	Not motivated by profit	Motivated by making a profit
Responsibility for Investment and Management	Business makes necessary investments and manages the worker’s work	Contractor makes necessary investments and manages their work

Control

This represents the level of control that the business has over the worker’s work. For example, an employee is typically subject to the business’s direction and control over their job. Meanwhile, contractors are usually free to set their hours and work methods.

Tools and Equipment

This refers to who provides the tools and equipment necessary for the worker to do their job. It refers to many items, such as hammers, specialized clothing, musical instruments, trucks, etc. For example, the business typically provides employees with tools and equipment. A contractor is usually responsible for providing their own.

Subcontracting

This refers to whether the worker can subcontract or assign their work to someone else. An employee usually cannot do this. A contractor may typically subcontract their work if they wish.

Financial Risk

This refers to who bears the financial risk regarding the labour performed. For example, businesses usually bear the financial risks associated with employees’ labour. Contractors typically bear the financial risk of their labour.

Profit Motive

This refers to those motivated by a desire for profit. For example, employees rarely receive additional incentives from profits the business earns. However, contractors usually become motivated by the potential to make a profit.

Investment and Management Responsibility

This refers to who makes necessary investments and manages the worker’s work. For example, businesses typically make necessary investments in employees’ work and manage it. Contractors usually make their investments and manage their work.

Defining a Contractor vs. Employee (Inside Quebec)

Quebec has a different method to determine who is a contractor and an employee. While the rest of Canada uses a series of factors, Quebec uses a three-step process. Follow these three steps:

1. Intent: The CRA seeks clarification on the nature of the relationship between the worker and the payer. Specifically, they want to understand whether the two parties intended to pursue an employer-employee relationship or a business partnership and the reason behind this decision.
2. Legal Definitions: The CRA reviews whether you work for someone or have a business based on specific factors outlined in the Civil Code of Québec. This includes factors such as carrying out the work, remuneration, and the relationship of subordination. 
3. Comparison: The CRA checks if the parties’ intentions align with the legal definitions of an employee or a contractor. 

Indicators of an employer-employee relationship include the payer directing and controlling various aspects of the work, establishing rules and disciplinary actions, and providing training or direction. Meanwhile, signs that someone is self-employed are being able to choose their schedule and clients, having the option to work for multiple employers, and delegating tasks to others.

Understanding CPP and EI for Contractors vs. Employees

The Canada Pension Plan (CPP) and Employment Insurance (EI) are social insurance programs that benefit Canadian workers and their families. CPP provides retirement income, disability benefits, and survivor benefits. EI benefits workers who are unemployed, on maternity or parental leave, or caring for a critically ill child. 

If a worker is an employee, then their employer is responsible for making CPP and EI contributions on their behalf. If a worker is a contractor, they are responsible for making their own CPP and EI contributions. Contractors can optionally contribute to EI or not. 

However, it’s important to note that misclassification of workers can have serious consequences. If an employer misclassifies an employee or a contractor, they may be liable for back CPP and EI contributions. Additionally, the worker may be entitled to back pay and other benefits. The remainder of this section will discuss contributions to each program.

CPP Contributions

Employers must actively make CPP contributions on behalf of their employees, encompassing both the employer’s portion and the employee’s share. The employer actively withholds the employee’s share is from their paycheck. Contractors actively assume responsibility for contributing their own CPP contributions, with an equal split between the employer and employee portions. It is important to note that CPP does not apply within Quebec.

EI Contributions

Employers must make EI contributions on behalf of their employees, with the rate being based on the employee’s gross salary or wages. On the other hand, contractors do not have to make EI contributions, but they can opt in by actively submitting a request.

Tax Writeoffs for Contractors Vs. Employees

The tax write-offs available to contractors and employees in Canada are different in a few key ways. First, contractors are responsible for paying their taxes, while employees have their taxes deducted from their paychecks by their employers. This means contractors must keep track of their income and expenses throughout the year to file their taxes accurately. A common way to do this is using a business credit card. Second, contractors have a wider range of expenses to claim as tax deductions. This includes business insurance, car expenses, advertising fees, and more.

On the other hand, employees have limited tax deductions available. They can claim only a few expenses, such as union dues and uniforms. It is important to note that the Canada Revenue Agency (CRA) has specific rules governing eligible tax deductions. Contractors and employees should actively seek the advice of a tax professional to ensure they claim all the entitled deductions. Here is a table that actively summarizes the critical distinctions in tax write-offs for contractors and employees in Canada:

Characteristic	Contractor	Employee
Employer withholds taxes?	No	Yes
Range of expenses that can be claimed as tax deductions	Wider	Narrower
Examples of expenses that can be claimed as tax deductions	Advertising, business insurance, car expenses, equipment, office supplies, professional fees, rent, travel	Union dues, uniforms
Need to consult with a tax professional	Yes	Yes

The Bottom Line

Hiring independent contractors can be an excellent way for businesses to save money and gain flexibility. However, it is crucial to classify workers correctly and comply with all applicable laws. Ultimately, deciding whether to hire independent contractors is complex and should be made case-by-case. Businesses should carefully consider the benefits and drawbacks before making a decision.