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employee or Independent contractor?

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Maral began her academic journey with a Bachelor of Psychology from York University, She then studied Doctor of Pharmacy at the University of Waterloo. Her deep-rooted passion for helping others ultimately led her to transition into the legal field. She earned her LL.B. from the University of Law in the United Kingdom and went on to complete her articles at a plaintiff-side personal injury firm, as well as a boutique firm in North York. There, she gained hands-on experience in multiple areas of law, including Real Estate, Family Law, and Wills & Estates. Maral brings a compassionate, client-focused approach to her legal practice, shaped by her diverse academic background and dedication to advocacy.

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Table of Contents

Know Your Rights Before You Sign an Agreement:

Are you an employee or an independent contractor?

Many Canadian businesses hire individuals as independent contractors rather than employees. However, just because an employer calls you an independent contractor, asks you to sign a contractor agreement, or pays you through invoices does not necessarily mean that you are legally considered self-employed.

The distinction is important because it can significantly affect your legal rights, financial security, and entitlements when your working relationship ends.

This pamphlet explains the differences between employees and independent contractors under Ontario law and what you should know before signing an agreement.

What Is the Difference Between an Employee and an Independent Contractor?

EMPLOYEE

An employee works for an employer under an employment relationship. Generally, the employer exercises a degree of control over the employee’s work, including the duties performed, working hours, workplace policies and manner in which the work is carried out.

Employees are generally entitled to statutory employment protections, including:

  • Minimum wage.
  • Vacation pay and vacation time.
  • Public holiday pay, where applicable.
  • Overtime pay, where applicable.
  • Protected leaves of absence.
  • Termination notice or termination pay, where applicable.
  • Severance pay, where applicable.
  • Workplace protections under applicable employment legislation.

Employers are also generally responsible for making applicable payroll deductions, including income tax, Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums.

Independent Contractor

An independent contractor is generally someone who operates their own business and provides services to another business or individual under a commercial arrangement.

Unlike an employee, an independent contractor typically:

  • Controls how and when the work is performed.
  • Has greater independence in deciding how to complete assignments.
  • May provide services to multiple clients.
  • Provides their own tools, equipment or resources.
  • Negotiates their own fees and payment arrangements.
  • Has an opportunity to earn a profit.
  • Assumes financial risks and business expenses.
  • May hire assistants or subcontract work.

Independent contractors are generally responsible for their own income tax obligations, CPP contributions and business expenses.

They are not automatically entitled to the employment standards protections available to employees.

 

Why Do Employers Prefer Hiring Independent Contractors?

There are several reasons why employers may prefer to engage independent contractors instead of hiring employees.
1: Reduced Employment Costs

Employers generally have additional financial obligations when hiring employees, including:

  • Employer CPP contributions.
  • Employer EI contributions.
  • Vacation pay.
  • Public holiday pay.
  • Overtime obligations, where applicable.
  • Certain statutory benefits and payroll-related expenses.

A genuine independent contractor arrangement can reduce these ongoing employment-related costs.

2:Fewer Employment Obligations

Employers generally have fewer ongoing employment obligations when dealing with genuine independent contractors.

For example, independent contractors are generally not entitled to statutory vacation pay, public holiday pay or overtime under Ontario’s Employment Standards Act, 2000 (ESA).

3: Greater Flexibility

Employers may prefer contractors because they can engage them for:

  • Specific projects.
  • Temporary assignments.
  • Seasonal work.
  • Short-term business needs.
  • Specialized professional services.

This allows businesses to obtain services without necessarily creating a permanent employment relationship.

4: Reduced Administrative Responsibilities

Employers may have fewer payroll, scheduling, benefits administration and employment-related administrative responsibilities when engaging genuine independent contractors.

5: Flexibility in Ending the Business Relationship

A genuine independent contractor agreement may provide greater flexibility regarding the duration and termination of the arrangement, depending on its terms and applicable legal obligations.

IMPORTANT: Although these arrangements can be commercially beneficial, employers cannot simply classify employees as independent contractors to avoid their legal responsibilities. Misclassification may expose an employer to significant financial and legal consequences.


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When Is Someone Legally an Employee Even Though Their Contract Calls Them an Independent Contractor ?

This is one of the most important issues in Ontario employment law.

The law looks beyond the wording of the agreement and examines the actual relationship between the parties.

For example, an individual may sign an agreement stating:

“I acknowledge that I am an independent contractor and not an employee of the company.”

However, if the actual working relationship resembles an employer-employee relationship, the individual may legally be considered an employee.

The label in the contract is not decisive. The reality of the working relationship matters.

The Ontario Ministry of Labour and the courts consider several factors when determining whether an individual is an employee or an independent contractor.

1.Control Over the Work

Does the employer control:

  • Your working hours?
  • Your daily schedule?
  • Where you must work?
  • How you perform your duties?
  • The specific tasks you must complete?
  • Your methods of performing the work?

The more control an employer exercises over an individual, the more likely the relationship may resemble employment.

2.Ownership of Tools and Equipment

Consider who provides the tools, equipment, materials, computers, vehicles and other resources required to perform the work.

If the employer supplies most of the necessary equipment and resources, this may indicate an employment relationship.

3.Financial Risk

Does the individual genuinely bear financial risks associated with operating a business?

An independent contractor generally assumes business expenses and may suffer financial losses.

An employee generally receives compensation without assuming the ordinary business risks of the employer.

4.Opportunity to Make a Profit

Can the individual increase their profits through effective business management, efficient performance or hiring additional workers?

An individual who simply receives a fixed hourly wage, without me

Examples: Employee or Independent Contractor?

Example 1: Likely an Employee

Sara signs an agreement stating that she is an independent contractor.

However:

  • She works Monday to Friday, from 9:00 a.m. to 5:00 p.m.
  • She must work at the employer’s office.
  • The employer provides her computer and equipment.
  • She receives a fixed hourly payment.
  • Her manager supervises her daily activities.
  • She cannot send someone else to perform her work.
  • She is expected to follow the employer’s workplace policies.

Despite signing an independent contractor agreement, Sara may legally be considered an employee.

 

Example 2: Likely an Independent Contractor

Ali operates his own consulting business.

  • He provides services to several different companies.
  • He determines his own working hours.
  • He negotiates his fees with each client.
  • He uses his own equipment.
  • He decides how to complete each project.
  • He can hire assistants when necessary.
  • He bears his own business expenses and financial risks.

Ali is more likely to qualify as a genuine independent contractor because he operates a business on his own account.

What Happens If an Employer Misclassifies an Employee as an Independent Contractor?

If an individual is legally an employee but has been improperly classified as an independent contractor, the employer may be required to provide employment-related entitlements that were previously denied.

Depending on the circumstances, these may include:

  • Unpaid vacation pay.
  • Unpaid overtime.
  • Public holiday pay.
  • Unpaid minimum wages.
  • Termination pay.
  • Statutory severance pay, where applicable.
  • Other applicable employment-related entitlements.

The employer may also face additional consequences, including:

  • Orders to pay outstanding employment entitlements.
  • Employment standards penalties.
  • Prosecution in appropriate circumstances.
  • Retroactive payroll obligations and applicable tax or CPP/EI assessments.

An employee may also have a potential civil claim for wrongful dismissal or other damages, depending on the circumstances and applicable law.

What If You Have Been Working as a Contractor for Several Years?

There is another important legal category in Ontario known as a Dependent Contractor.

A dependent contractor is generally a worker who is technically not an employee but is economically dependent on one particular business.

For example, an individual may:

  • Work for the same company for many years.
  • Receive almost all of their income from that company.
  • Have little opportunity to provide services to other businesses.
  • Have a long-standing and relatively exclusive working relationship with the company.

In these circumstances, the individual may qualify as a dependent contractor.

Why is this important?

Ontario courts recognize that dependent contractors may be entitled to reasonable notice of termination, similar to employees under the common law.

Therefore, even if you are not legally an employee, you may still have rights when the business relationship ends.

Can You Challenge Your Classification?

Yes. If you believe that your employer has improperly classified you as an independent contractor, you may have several options.

Depending on the circumstances, you may:

  1. Seek legal advice regarding your employment status.
  2. Request a review of your status by the Ontario Ministry of Labour.
  3. File an employment standards claim for applicable unpaid entitlements.
  4. Request a Canada Revenue Agency (CRA) ruling regarding your employment status for CPP and EI purposes.
  5. Pursue a civil claim where appropriate.

The appropriate procedure depends on the nature of your claim, the applicable legislation and the remedies you are seeking.

Can You Challenge Your Classification?

Before accepting a contractor arrangement, consider the following questions:

  • Am I genuinely operating my own business?
  • Can I work for other companies?
  • Do I control my working hours?
  • Can I negotiate my compensation?
  • Am I responsible for my own business expenses?
  • Do I have the freedom to determine how the work is performed?
  • Can I hire someone else to complete the work?
  • Am I assuming genuine financial risks?

If the answers suggest that you are functioning like an ordinary employee, you should obtain legal advice before signing the agreement.

Remember: Signing an agreement does not automatically eliminate your employment rights.

Protect Your Employment Rights:

Whether you are an employee, an independent contractor or a dependent contractor, understanding your legal status is essential.

An agreement may describe you as an independent contractor, but that does not necessarily determine your legal rights.

Get legal advice before signing an agreement or accepting a classification that could affect your employment entitlements.

Frequently Asked Questions

We understand that the process can be confusing and you may have many questions.
Below are some common FAQs that can help guide you.

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