Understanding The Distinction: Contractor vs Employee

DISCLAIMER 

This information is intended for business owners in Canada and serves as general guidance only. Always consult with a qualified advisor before making any legal decision.

In this article, we’ll cover the following topics: 

• Hiring a contractor vs an employee

• What is a contractor?

• What is an employee?

• Independent contractor vs employee: The legal perspective

• Weighing the pros and cons

• Navigating potential pitfalls: CRA’s classification

• Making the right choice: Consult with experts

Introduction

Greetings! I’m Steve Parr, a dedicated business lawyer in the bustling city of Vancouver, British Columbia. Today we will explore an important topic that should not be neglected, especially for the business owners looking to expand their team. 

Hiring a contractor vs an employee

Every budding entrepreneur reaches a point in their business journey where they need to expand their team. At this juncture, the question inevitably arises: should you hire a contractor or an employee? 

You can think of it as deciding between buying a house or renting one - each option has its benefits and obligations. 

To help guide you through this decision, let's break down the differences between contractors and employees, explain why these differences matter, and provide examples to make these concepts more digestible.

What is a Contractor?

An independent contractor is a self-employed professional who operates under a contract for services. This definition may seem straightforward, but what does it mean in practice? 

Unlike employees, contractors run their own businesses, manage their working hours, bear the responsibility for profit and loss, and generally serve multiple clients.

Picture a freelance graphic designer. They own their design business, set their working hours, manage their taxes, and juggle projects from various clients. This individual is an example of an independent contractor. 

Like our designer, a contractor operates under a contract for services, carrying their business responsibilities and managing their profits and losses.

You may hire this designer to create a logo for your company. Once the design is completed and you've paid their invoice, their job is done, and the contractual relationship ends. Much like hiring a plumber to fix a leak, their service is complete once the problem is resolved and payment has been made.

This simplicity, flexibility, and the absence of long-term commitments like severance pay often make contractors an attractive choice for businesses, particularly for short-term projects or specialized tasks.

However, there are certain risks involved. For one, contractors are external entities, which could mean less control over the work done. Also, since contractors often juggle multiple clients, they might not be as invested or loyal to your business as an employee might be.

What is an Employee?

In contrast to a contractor, an employee is hired under a contract of service. Employees are more integrated into the business than contractors. An employee's working hours, wages, and responsibilities are dictated by their employer. They follow their employer's established work methods, typically have only one employer, and are expected to perform their tasks using the tools and resources the employer provides.

Now, consider a cashier at your local grocery store. The store manager determines their working hours, wages, and responsibilities. They use the store's cash register, follow the store's policies and procedures, and they only work for this one employer. This cashier is an example of an employee.

Employing staff, much like buying a house, brings more responsibilities but also more control. For instance, the grocery store is responsible for ensuring the cashier gets their entitled breaks and manages their payroll taxes. However, the store also gets to dictate how and when the cashier performs their work.

Employees can offer stability to your business, and they are more likely to understand your operations. However, employing staff comes with added obligations, such as providing employee benefits and adhering to employment standards legislation.

Independent Contractor vs Employee: The Legal Perspective

Here's where things can get tricky for you. You might think you've hired a contractor, but legally, they could be considered an employee. It's like calling a garden shed a garage - just because you store your car in it doesn't change its classification.

The Canada Revenue Agency (CRA) decides whether a worker is a contractor or an employee based on the reality and nature of the working relationship, not the job title. 

If they determine you've misclassified an employee as a contractor, the same way you've been calling your garden shed a garage, you might face hefty financial penalties.

This is why understanding the key legal differences between a contractor and an employee is crucial. These include factors like financial risk, control over the work, provision of tools and equipment, and whether the worker can subcontract the work or hire assistants.

Weighing the Pros and Cons

Deciding between a contractor and an employee is a lot like choosing between buying or renting a home. Hiring a contractor offers you flexibility (like renting) and cost efficiency, particularly for project-based or seasonal work, but you also have less control over their work and may experience less dedication from them.

On the other hand, hiring an employee can offer benefits, such as stability and commitment to your business (like buying). Still, it also comes with obligations such as labour laws, such as the Employment Standards Act of BC, which guarantees minimum wage, severance pay, and more. Employers are also obligated to withhold CPP, EI, and income tax contributions from employees' salaries.

Beyond the legal obligations, employees can offer stability and a sense of loyalty to your business. Contractors, on the other hand, are often looking out for their next gig. However, they can bring specialized skills or expertise that your business lacks and can quickly help you scale your operations.

Navigating Potential Pitfalls: CRA's Classification

Just because a worker has a corporation, it doesn't automatically mean they are a contractor. If you hire a graphic designer who has their own business but works exclusively for you and follows your rules, the CRA might consider them an employee, not a contractor. The CRA has published an excellent guide here, so enjoy - but beware, there is a lot of gray area and room for interpretation contained within their very wordy guide. So - leave it to us.

Making the Right Choice: Consulting with Experts

Choosing between a contractor and an employee can be complicated. Much like getting advice from a real estate agent when buying or renting a home, it's advisable to consult with a legal expert when deciding between a contractor and an employee. 

They can help you understand the nature of the relationship with the worker and draft an appropriate agreement, steering you clear of any potential pitfalls.

In essence, the contractor vs employee decision is akin to choosing between renting and buying a house. Each comes with its own set of benefits and responsibilities. It's all about weighing up what's best for your business at this particular time and making an informed decision. And remember, as your business grows and evolves, your hiring needs might too.

As always, we are here to help you distinguish between a contractor and an employee - especially if you are thinking of expanding your team. Please feel free to reach out for further guidance!