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In the Canadian workforce, there are two types of workers: employees and contractors (also commonly referred to as independent contractors). Often, businesses use a combination of both employees and contractors to accomplish their goals. But – what exactly is the difference?
In short, an employee has more restrictions but is reliably compensated. On the other hand, a contractor is free to work how they’d like, but bears financial risk. Neither option is superior, it all depends on how you prefer to work, what skills you can provide and what opportunities are available to you. To explore more about employee and contractor divergences, keep reading.
What’s the Difference Between an Employee and a Contractor?
You have likely heard of both employees and contractors but may not know the technicalities. The two worker categories are mutually exclusive meaning you cannot be both at the same time with the same employer. In addition, they have practical differences that impact both the worker and the business. Let’s explore these differences in depth below.
- Entitled to Benefits in the Employment Standards Act (ESA). Employees are entitled to laws such as minimum wage, severance pay, overtime pay, among many other statutory benefits in the ESA.
- Full Attention. More often than not, employees need to dedicate their full time and attention to their employer. They cannot have a side business or second job in most cases.
- Payroll Deductions. Wages earned by employees are subject to the Canada Pension Plan (CPP), employment insurance (EI) and income tax deductions straight from their paycheque.
- Tools and Equipment Provided. Employees are provided all the necessary tools and equipment required to perform their job. This could include uniforms, computers, office space, vehicles, and the list goes on.
- Restricted to Salary or Wages. The employee does not earn more when a company is profitable or less when the company is not profitable. In other words, they do not bear the risk of operating the business, their salary or wages are fixed.
- Constraints on Performance. Employees must do their job on their own and perform the work in a manner specified by the employer. Furthermore, an employee can’t hire someone else to do their job for them and aren’t allowed to perform the work however they’d like.
- Employment Standards Act (ESA) Does Not Apply. As a contractor, you are not covered by the ESA.
- No Limitations on Work. Contractors are not limited in how much work they can perform. They can have multiple customers at one time.
- Work is Invoiced and Taxes Are Remitted by the Contractor. Any work completed by the contractor is invoiced to the business. The contractor is responsible for tracking income and remitting taxes to the government, such as income tax and HST.
- Supply Their Own Tools and Equipment. Contractors are responsible for supplying their own tools and equipment to perform their work.
- Bear the Risk of Gain or Loss. If the business a contractor runs is profitable, the contractor will benefit directly. On the contrary, if the business is not profitable, the contractor will face the loss directly. The business risk is placed on the contractor entirely.
- Business is Theirs to Operate. However a contractor wants to run their business is acceptable, so long as they abide by the appropriate laws and regulations. They can hire employees to help with work and control the way work is performed.
- Eligible Expenses are Deductible. Contractors essentially run their own business which means that they can deduct eligible expenses against their income on their tax return.
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Which is Better, Being an Employee or a Contractor?
The fact of the matter is, being an employee isn’t better than being a contractor and being a contractor isn’t better than being an employee. Determining to be an employee or a contractor is entirely a personal choice based on corresponding advantages and disadvantages. To understand which would suit you better, consider the pros and cons below.
- Various employee benefits including, but not limited to, disability insurance, provincial medical plan, vacation pay, extended health benefits, workers compensation coverage, and pension plans
- Compensated for overtime hours and at a higher rate
- Record keeping of income and expenses not required
- Eligible for employment insurance (EI)
- 50% of Canada Pension Plan (CPP) premiums paid by employer
- Qualify for Canada employment tax credit
- Difficult to be terminated, more job security
- Severance pay is usually applicable on terminations
- Expenses are rarely tax-deductible
- Required to pay employment insurance (EI) premiums
- Little control over work schedules and conditions
- Many expenses are tax-deductible, such as client entertainment or business travel
- Registering for a GST, PST or HST account can improve cash flow
- Unless voluntarily paid, no employment insurance (EI) premiums required
- Able to work with multiple customers at a time
- Flexible working conditions and hours
- Opportunity to control and increase your own profits
- Responsible for paying employee and employer portions of Canada Pension Plan (CPP)
- Cannot collect employment insurance (EI), unless voluntarily paid
- Severance pay not applicable to terminated contractors
- Contractors bear the risk of loss
- Responsible for purchasing and maintaining tools and equipment
- Contractor liable if contractual obligations are not fulfilled, liability insurance might be necessary
- Record keeping of income and expenses is needed and might require a bookkeeper or accountant
- Financial management necessary to ensure timely payment of taxes, payroll, and other large expenses
- No employee benefits
- Registering for a GST or HST account is usually required
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Why Do Businesses Prefer Contractors Over Employees?
In general, businesses prefer contractors over employees because there is less work and responsibility involved. When a business has employees, they need to abide by employment laws, keep adequate records, provide tools or equipment for the job, train employees, the list goes on. As you can imagine, this is a lot of work which most businesses would prefer to avoid if they can.
Because there is a clear motive for businesses to favour contractors over employees, it’s important to remain vigilant as a worker. Businesses sometimes take advantage of contractors by providing them with the work of an employee, but compensating them or classifying them as a contractor. It’s in the business’ best interests to do so, but not in yours.
Are you self-employed? These are the tax issues you should be aware of, click here.
Knowing If You’re an Employee or a Contractor
Knowing whether you’re an employee or a contractor can be difficult as there are a lot of grey areas in the world of work. There are some simple ways to determine your employment status, for example checking your pay statement for income taxes or evaluating the restrictions on the work you perform. If you still can’t figure out if you’re an employee or a contractor, consider the following criteria below used by courts in Canada in relation to the matter.
- Profit or Loss Risk. Contractors have some level of financial risk, they have some degree of control over profit or loss. Employees typically do not bear this risk.
- Tools and Equipment. Employees are often supplied tools and equipment, but contractors must supply their own.
- Control. A greater level of control is exercised by an employer over an employee than by a client over a contractor.
- Integration. An employee’s job tends to be an integral part of an employer’s business. If they fail to perform those tasks, the employer may suffer. Whereas contractors are not as integral to the employer’s operations.
Why Does it Matter if I’m an Employee or Contractor?
As mentioned, both worker types have their pros and cons, so why does it matter how you’re classified? The biggest reason it matters is related to Canadian income tax. Employees and contractors are taxed differently which makes the CRA particularly sensitive to this area. Employers are responsible for classifying their workers properly and so are the workers which is why it’s important to make the distinction.
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