Contractor or employee? Why the label in your contract does not decide

This is legal information, not legal advice. It describes general rules that vary by province and by situation. A licensed lawyer must review your matter before you act on anything here.

Plain-English summary

Businesses often assume that a signed agreement calling someone an independent contractor settles the question. It does not. Courts and the Canada Revenue Agency look at how the relationship actually works. The written label is evidence, and it is not decisive.

Canadian law also recognises an intermediate category — the dependent contractor — for people who are genuinely in business for themselves but work primarily for one client. Dependent contractors are generally entitled to reasonable notice of termination even though they are not employees.

What is actually assessed

No single factor decides it. The analysis weighs the overall relationship, looking at questions like:

Control. Who decides how, when and where the work is done? Setting hours, requiring specific methods and close supervision all point toward employment.

Tools and equipment. Who provides what is needed to do the work?

Chance of profit and risk of loss. Can the worker make more by working efficiently, or lose money on a job? A genuine contractor bears business risk. Someone paid a fixed rate for time, with no risk, looks more like an employee.

Integration. Is the person doing work that is central to your business, alongside your staff, presented to customers as part of your team? Or delivering a defined service as an outside business?

Exclusivity and duration. Someone working full-time for one client for years, with no other customers, is hard to characterise as independent regardless of the paperwork.

What misclassification costs

The exposure is broader than most businesses expect, and it usually surfaces all at once:

• Retroactive source deductions, plus CRA interest and penalties, for amounts that should have been withheld and remitted
• CPP and EI, including the employer portion
• Employment standards entitlements — vacation pay, overtime, public holiday pay — for the whole period
• Notice on termination, which is often the largest single item, and which applies to dependent contractors too
• Workers' compensation premiums and coverage gaps

Reclassification is frequently triggered by the worker themselves, at the end of the relationship, when they are told the arrangement is ending and consult someone about their entitlements.

Key risks to watch

Long-term "contractors" who work like staff. The longer the arrangement runs and the more exclusive it is, the weaker the classification becomes — even where it was defensible at the start.

Incorporation as a fix. Having the worker invoice through their own corporation helps, but it does not settle the question on its own. The CRA can still look through to the substance of the relationship, and personal services business rules may apply.

Copying US practice. The Canadian tests are their own, and the dependent contractor category has no direct US equivalent.

Assuming IP follows automatically. Independent contractors generally retain copyright in what they create unless they assign it in writing. Employers own copyright in employee work made in the course of employment by default. This catches out companies during due diligence, when it emerges that a freelancer owns core code or brand assets.

When to talk to a lawyer

Get advice before engaging someone long-term as a contractor, particularly if they will work primarily or exclusively for you, if the role looks like a staff position, or if you are converting an existing contractor to employee status.

If a contractor relationship is ending and the person has worked mainly for you for a sustained period, it is worth understanding your notice exposure before you end it rather than after.