The Differences Between Contractors and Employees Explained

A core part of every business is its workforce, but not all workers are classified the same way. Two primary types of workers are employees and contractors.

Classifying your workforce correctly is a key point of compliance with provincial employment legislation, and errors can lead to expensive consequences—including unpaid entitlements, penalties and legal disputes.

To ensure compliance with your provincial standards, make sure that your policies are airtight and followed by your management, and get expert HR advice before any problems arise.

The key differences between employees and contractors

There are key factors that will help define whether a worker is an employee or contractor. For more information, select the corresponding key factor for a deeper explanation.

A common error that employers make is assuming that all of the above factors have to be met for someone to be considered an employee; but this is a risky assumption.

When a court or employment standards regulatory body evaluates a worker’s classification, they look at the overall nature of the working relationship. Control of the worker and their integration into a business are some of the most scrutinized aspects of a working relationship.

Even if there was a written agreement between an organization and worker that a worker was an independent contractor, but they were highly integrated into the business, and their work was directed by an employer, there would be grounds to deem them an employee.

Employees and contractors defined

Employees

As a broad definition, an employee is a person who receives wages for performing work or providing services for another, working under the control and direction of an organization.

Employees are entitled to statutory minimum entitlements and protections, such as minimum wage, vacation time and pay, and more.

However, the strict definition of an employee varies by employment legislation:

• In Ontario, an employee is a person who performs work or supplies services to an employer for wages.

• In British Columbia, an employee is a person receiving or entitled to wages for work performed for another, or a person that an employer allows, directly or indirectly, to perform work normally performed by an employee.

• In Alberta, an employee is defined as anyone employed to do work and who is in receipt of or entitled to wages.

Contractors

A contractor is a business or self-employed individual that provides services to a business under a contract, but maintains control over how the work is completed—and is compensated by fees, typically through invoicing the business.

Contractors are not entitled to statutory minimum entitlements and protections.

A comparison of employees and contractors

Below are the different factors that a court or regulator will consider when determining whether a worker is an employee or a contractor.

When identifying work that needs to be completed, you can use this framework to determine which you should hire.

Control

Employees

Employees work under the direction of the employer, who sets hours, tasks, performance expectations, and how the work should be done.

Contractors

Contractors control how, when and where the work is performed. Employers typically define the outcome or deliverables, which leaves the contractor responsible for methods, workflow and scheduling.

Payment

Employees

Employees are generally paid through payroll on a fixed wage or salary. While some may also receive performance-based bonuses or commissions, their base pay is guaranteed and must be delivered consistently and on schedule.

Contractors

Contractors are provided compensation under commercial terms, such as retainers, invoices for hourly work, milestone payments and project fees. Payment is tied to deliverables or hours worked, and contractors are responsible for managing their own business expenses and cash flow.

Risk & Reward

Employees

Employees bear minimal financial risk. Employers cover costs, errors, and losses related to the work, and employees are guaranteed their base pay regardless of business performance or efficiency.

Contractors

Contractors assume the financial risk for the work that they perform. Costs and delays can reduce their profit. Unlike employees, contractors’ income is not guaranteed, and can vary depending on how successfully they deliver their services.

Tools & Equipment

Employees

Employers provide the necessary tools, equipment, software, and materials for employees to perform their work efficiently and according to company standards.

Contractors

Contractors typically supply and maintain their own tools, technology, software and materials required to complete the work. Employers aren’t responsible for providing or maintaining these resources.

Integration

Employees

Employees are embedded in the organization; they follow company policies, procedures, and reporting lines, may wear uniforms, and participate in workplace routines.

Contractors

Contractors operate as independent business entities and are not embedded in the organization. They generally do not follow internal policies beyond basic project requirements, and can provide services to multiple clients simultaneously.

Benefits & Protections

Employees

Employees are entitled to statutory employment protections, including vacation pay, statutory holidays, overtime, and termination notice or severance where applicable. Employers are responsible for providing and upholding these protections.

Contractors

Contractors are not entitled to employment standards protections, such as statutory holidays, vacation pay or protected leave. Any benefits contractors have will be self-managed.

When hiring a contractor that operates as a business, that business is responsible for managing its own compliance with employment or corporate rules. Employers are only responsible for what is explicitly agreed in the contract.

Taxes & Deductions

Employees

Employers deduct and remit income tax, CPP contributions, and EI premiums on behalf of employees, in line with federal and provincial requirements.

Contractors

Contractors are responsible for their own income tax, CPP contributions, and any other statutory remittances. Employers do not deduct or remit taxes on their behalf.

Misclassifying employees and contractors

Misclassification can occur when a worker is treated as either a contractor or employee incorrectly, regardless of the agreed contract.

When Canadian regulators and courts evaluate classification, the nature of the relationship is evaluated, more than the official title or contracts. Just because a contract is signed, does not mean that someone is necessarily a contractor—even if both parties agree to the terms.

Why worker misclassification happens

• Employers may prefer contractors to avoid statutory obligations, such as vacation pay, overtime, or termination notice.

• Job titles and contracts may be drafted without fully assessing the actual working relationship.

• Rapid scaling or informal hiring practices can lead to assumptions about independence rather than evaluating the reality of control, integration, and risk.

How workers are classified

Authorities and courts take a multi-factor approach, considering the entire working relationship:

• Control: Who directs the work and how strictly?

• Integration: How embedded is the worker in the company’s operations?

• Financial independence: Does the worker bear risk or opportunity for profit?

• Provision of tools and resources: Does the worker use company-provided equipment?

A worker can be considered an employee even if they invoice for services, provide some of their own tools, or have a written contractor agreement.

The consequences of misclassification

The consequences can be significant for employers:

Financial liabilities

Employers may be required to pay retroactive wages, vacation pay, overtime, and severance. These payouts could span into tens of thousands of dollars, especially if they took place over an extended period of time.

Penalties and interest

Failing to deduct and remit income tax, CPP, and EI contributions can trigger fines and interest charges.

Legal claims

Misclassified workers can pursue wrongful dismissal or statutory claims.

Operational risk

Discovering misclassification late can disrupt payroll, accounting, and HR processes.

Reputation

Misclassification can harm credibility with employees, contractors, clients, and regulators.

How to properly classify workers in your business

Getting worker classification right starts with looking at how work is actually performed. Titles and contracts alone don’t determine status, employers should evaluate the tasks that they're assigning to their workers.

Key steps to classify workers properly:

• Ensure agreements reflect real responsibilities and deliverables.

• Document assignments, reporting, and role changes.

• Review classifications regularly as roles evolve.

• Set clear operational boundaries to maintain independence.

• Seek HR or legal guidance when classification is unclear.

Agreements and records

Clear agreements should define the work to be done, how deliverables will be measured, reporting expectations, and payment terms. These agreements must match the worker’s day-to-day practices.

Detailed records of assignments, communications, and role changes support defensible classification decisions to regulators and courts.

Role changes

Roles change over time. A contractor may gradually take on employee-like responsibilities or become more integrated into operations. Regularly reviewing classifications ensures arrangements stay accurate.

Setting clear, strict boundaries is essential, contractors should not be required to follow employee-only policies, adhere to strict schedules, or use company tools in ways that imply control.

Management teams

Managers and supervisors play a role too. They should understand the differences between employees and contractors to prevent informal practices from blurring the line. When there is any uncertainty, consulting legal professionals or expert HR advice ensures classifications in your business will remain compliant and defensible.

Need help with classifying your workers?

BrightHR is here to help. We offer expert, 24/7 HR advice, for all of your questions about your workforce. If you want to get access to compliant employment contract templates or manage your HR more effectively, we offer a solution for you.

Book a free demo today to find out how BrightHR can help your business.