The businesses as well as the individuals in Canada should know the key differences between an employment and a contract as they encounter them quite often. For this, it is important to learn about legal frameworks, tax implications and benefits beforehand, to make informed decisions for your business or career.
Misclassifying an employee can have legal and financial consequences. This blog provides a simpler breakdown of the defined roles and their legal implications to more clearly distinguish between workers and contractors in Canada.
An employee works for an organization and signs a proper employment contract. You must assume well-defined duties and receive a weekly, monthly or annual salary. In addition, employees have legal rights regarding wages, sick leave, vacations and pensions. The relationship between an employee and an organization is purely business-related. This relationship can be extended over time. The duration depends mainly on the employer’s decision about the employee’s work ethic and the work process, schedule and work results.
Self-employed individuals or organizations act as contractors. Clients hire these individuals or organizations to complete a project or provide a specific service. You work under contract conditions for a specific period of time or until a specific order is completed. While employees have much less freedom in how they work for their employer, contractors rarely receive similar benefits or protections as employees.
In Canada, various laws, including labour standards and tax regulations, set out the legal distinction between employees and contractors. The critical determinant is the nature of the working relationship, which is assessed based on several factors:
Employees usually work under the supervision and direction of their employer. Compared to employees, contractors have relatively high freedom in how and when they work.
Company employees mainly use tools and equipment to perform tasks. It is common practice for contractors to bring their own equipment and requisites to the site.
No financial risk is involved because the employees are paid a fixed wage. Contractors, however, face fiscal vulnerability as their earnings fluctuate depending on the position of the contract and market price.
An employee is a participant within the organizational system. Contractors remain independent and take on projects beyond their current ones.
Contractors are considered self-employed. They must manage their taxes, such as GST/HST if registered, and CPP. People fully expect them to file taxes on their own and maintain tax compliance.
Employees working under a certain organization or business enjoy various benefits and protections under Canadian law.
This covers minimum wage, overtime pay, vacation pay, and statutory holidays.
Notice of termination and payment for severance pay depending on the number of years of service.
Employment under occupational health and safety regulations.
Contractors can put their business at risk through contracts by jointly linking or combining their work with the contractor or business. Therefore, the business must create a carefully written contract for the contractor to sign. When two parties have clear agreements, it becomes easier for them to develop disagreements because everyone will have a clear understanding of their roles.
Employers typically hire employees with an employment contract that outlines and agrees on duties, working conditions, and remuneration terms. This contract must respect provincial employment standards and federal laws of the country.
Comparing employees and contractors is essential as it enables organizations to organize workers and follow the laws. Furthermore, at a personal level, differentiating between an employee and a contractor makes it possible to receive proper remuneration and meet your legal obligations in terms of taxes.
It is important to clearly understand the differences between employees and contractors. Both professions significantly contribute to Canadian society but differ on various terms, like control, financial liability, and remuneration. Both employers and employees need to understand these differences to avoid legal complications and to acquire the most benefits from working relationships.
