When hiring workers in Canada, it's crucial to classify them correctly—otherwise you risk significant fines and penalties.
As part of the Canada Revenue Agency (CRA) crackdown on misclassification of workers, companies have been ordered to pay millions of dollars in back taxes and penalties, for example:
- Foodora: $3.5 million in unpaid taxes and penalties
- Instacart: $11 million settlement
Misclassification is also damaging for workers: it cheats employees out of benefits and protections they're entitled to under Canadian law, such as minimum wage, overtime pay, vacation pay, and employment insurance benefits. This has a negative impact on the company’s reputation, too.
Learn about how to classify your workers correctly—and stay compliant with Canadian labor and employment laws—in this guide.
Table of Contents
- Classifying workers in Canada
- What is an employee in Canada?
- What is a contractor in Canada?
- Worker classification overview: Employees vs contractors in Canada
- How to classify your global workers in 90 seconds
- Tests to classify workers in Canada
- Penalties for misclassifying workers in Canada
- Hire, manage, and pay employees and contractors in Canada with Rippling—without worrying about classification
Classifying workers in Canada
As in many countries, Canada categorizes employees and contractors differently—and classifying them correctly can be the difference between smoothly running your global team and racking up huge fines and penalties (more on those below).
What is an employee in Canada?
In Canada, an employee is defined as an individual who works for an employer in return for wages or other remuneration. Employees are defined by various federal and provincial laws, but the most important distinction is that Canada's robust worker protection laws always apply to employees—meaning they're always entitled to statutory benefits, including:
- Minimum wage
- Canada Pension Plan (CPP) and Employment Insurance (EI)
- Vacation pay
- Holiday pay
- Sick leave
- Overtime pay
- Parental leave
What is a contractor in Canada?
In Canada, a contractor is defined as an individual who provides services to a business or organization, but who is not an employee of that business or organization. Independent contractors are also known as self-employed individuals, consultants, or freelancers.
Canada has a few different types of contractors (more on those below).
Worker classification overview: Employees vs contractors in Canada
- High level of worker control. Contractors are generally given more autonomy to determine how to complete the work and when to do it.
- Equipment and tools are owned by the worker.
- Less integrated. Contractors tend to be independent, they’re more likely to work remotely, and they use their own tools and equipment.
- No entitlement to benefits. Contractors are not entitled to the same benefits and protections as employees, and they are responsible for paying their own taxes.
- Time-bound engagement. Contractors are typically engaged for a specific project or period of time.
- Risk of loss. Contractors may assume more risk and liability for the work they perform.
- Non-exclusive services. Contractors cannot be contractually bound to a single company; they can provide their services to more than one organization.
- More direction from the employer. Employees are generally subject to more control and direction from their employer, who will provide guidance on how to perform the work and may set specific hours of work.
- Equipment and tools are typically provided by the company.
- Highly integrated. Employees are typically more integrated into the employer's organization, for example, they may work at the employer's premises.
- Entitled to benefits. Employees are entitled to certain employment benefits and protections, such as minimum wage, overtime pay, and vacation pay. They may also be entitled to benefits like health insurance, retirement plans, and paid sick leave.
- Indefinite engagement. Employees are generally hired for an indefinite period of time.
- No risk of loss. Employees are generally protected from liability for work-related issues.
- Exclusive services. Employees can be contractually bound to provide services to just one company.
How to classify your global workers in 90 seconds
Are you classifying your workers correctly? Find out now.
Accurately classifying your employees and contractors is crucial for complying with employment regulations in Canada and around the world. With our free classification quiz, you can mitigate the potential business risks and ensure you’re correctly classifying employees and contractors—in just 90 seconds.
Tests to classify workers in Canada
If you want to classify workers yourself, the Canadian government has created a series of "tests" that help define the employment relationship—and whether it's an employer-employee relationship or an employer-independent contractor relationship.
Keep in mind that in a dispute, Canadian courts and tax authorities look at all aspects of the working relationship, and no single test should be considered conclusive for classifying a worker.
The first formal attempt to classify workers in Canada was the Control Test, which evaluates the amount of control the employer has over the worker.
As the court decision (Regina v. Walker) put it: "A principal has the right to direct what the agent has to do; but a master has not only that right, but also the right to say how it is to be done."
In more recent years, the Control Test has been seen as too simplistic for deciding worker classification, but it's still a good starting point when classifying workers in Canada.
According to the Fourfold Test, which says the "control in itself is not always conclusive," courts should instead look at a combination of four factors (Montreal v. Montreal Locomotive Works Ltd):
- Ownership of tools
- Chance of profit
- Risk of loss
One of the most recent court decisions related to classification helped inform the Integration Test, which asks whether the service being provided by the worker is (Stevenson Jordon and Harrison, Ltd. v. MacDonald and Evans):
- An integral part of the business, or
- Done on behalf of the business, but not integrated into the business.
In other words, look at factors like whether the contractor is subject to their employer's policies, has an employer-sponsored email address, and so on.
Another important consideration is whether the business could function without the worker's contributions—if not, they're likely integral to the business and may not be classifiable as a contractor.
Classification factors to consider
Some other factors to consider when classifying workers in Canada include:
- Degree of economic dependence. Contractors are economically separate from the businesses or clients they work for. They pay their own taxes and provide for their own benefits.
- Exclusivity of service. Contractors can freely provide services to other organizations, while employees may be subject to non-competes and policies preventing them from working for other businesses, especially in the same industry.
- Length of engagement. Contractors can be engaged indefinitely, but they can also be contracted for a fixed term or on a per-project basis. Employees most commonly have an indefinite working arrangement.
- Degree of control and integration. These factors have been determined by Canadian courts—more on this below.
Classifying workers in Canada is complex. Check if you're classifying them correctly with our free quiz.
Types of contractors in Canada
When hiring contractors, it’s important to remember that there are different types of contractors in Canada:
- Incorporated contractor
- Sole proprietor
- Dependent contractor
Learn about each type in more detail below.
Incorporated contractor (INC)
In Canada, an incorporated contractor is a type of independent contractor who operates their own incorporated business. Instead of providing services as an individual, an incorporated contractor provides services through their own corporation, which is a separate legal entity from the contractor themselves. The corporation is responsible for entering into contracts with clients and for providing the services, rather than the individual contractor.
Incorporated contractors are sometimes referred to as personal services corporations or PSCs. They are often used by professionals, such as doctors, lawyers, and consultants, who want to provide their services through a corporation for tax or liability reasons.
Sole proprietor (SP)
A sole proprietor in Canada is an individual who owns and operates a business as a single-person enterprise. A sole proprietorship is the simplest and most common form of business organization, and it's often used by small businesses, such as consultants, freelancers, and home-based businesses.
As a sole proprietor, the individual is the sole owner of the business and is personally responsible for all aspects of the business, including the liabilities and debts. The business is not a separate legal entity from the individual, so all income and expenses are reported on the individual's personal tax return. In other words, the sole proprietorship and the individual are considered the same legal entity for tax and legal purposes.
In Canada, a dependent contractor is a type of worker who is in a hybrid employment status that falls between that of an employee and an independent contractor. Dependent contractors are sometimes also referred to as "dependent self-employed" or "dependent entrepreneurs."
Unlike independent contractors, dependent contractors are not in business for themselves and they usually rely on a single client or a small number of clients for the majority of their income. They are also more integrated into the client's business than independent contractors, and may work for the client for a long period of time.
On the other hand, dependent contractors are not employees, as they maintain some level of independence in terms of how they carry out their work and how they manage their schedule. They also generally provide their own tools and equipment and are responsible for their own expenses.
The status of dependent contractor is not explicitly recognized under Canadian employment law, but it has been recognized in some court decisions as a distinct category of worker.
Penalties for misclassifying workers in Canada
Businesses found to have misclassified employees as contractors in Canada face serious financial risk. Here are some of the potential costs, fines, and penalties:
- Penalties of 10% to 20% on unpaid income tax, EI and CPP premiums, plus interest
- Unpaid workers compensation premiums, plus fines and interest
- Both the worker's and employer's share of unpaid Canada Pension Plan premiums
- Minimum wage, overtime, parental leave, vacation pay, and other unpaid statutory benefits
- Potential claims for wrongful dismissal damages
There's more than just the financial risk. Companies found misclassifying workers can suffer from other consequences, such as legal disputes, reputational damage, difficulty recruiting new workers, negative impact on employee morale, and increased scrutiny from government agencies.
The Canada Revenue Agency and other federal and provincial agencies and ministries are motivated to audit and investigate businesses they suspect are misclassifying workers so they can increase their tax revenue. Misclassification, whether accidental or intentional, is risky and potentially very costly.
Hire and pay contractors and employees in Canada with Rippling—quickly and compliantly
Running a global workforce is hard work—especially when it comes to understanding and complying with local labor laws.
- With Rippling, you can onboard and pay contractors in Canada in a single system with localized onboarding, flexible payments in local currency or USD, and country-specific consulting agreement templates.
- You can also hire full-time employees in Canada through a Rippling entity. Rippling provides benefits, ensures compliance, and handles employee events like leave, performance management, and terminations.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any related activities or transactions.