PEO Canada

Contractor or Employee? 6 Helpful Factors to Consider

September 2, 2025
, 10:48 am
, Human Resources

Hiring the right talent is one of the most important investments any business can make. In today’s economy, companies are constantly looking for flexible and effective ways to meet their business needs, which often means exploring different types of working relationships. Should you hire an independent contractor or bring on a permanent employee to grow with your team? Each option comes with its own set of benefits and risks, and the choice you make affects your legal and tax obligations as well as talent management.

Understanding the differences between independent contractors and regular employees is crucial to making an informed decision. What is best for your business will depend on your goals and objectives, the nature of work, budget constraints, and company outlook. It is also important to note that, in Canada, misclassifying employees can lead to costly consequences. These can include legal disputes, owing back pay, penalties/fines, and damage to the company’s reputation.

Although it is up to an employer to decide whether to seek out an independent contractor or to hire an employee, the actual classification is determined by government agencies, such as Canada Revenue Agency (CRA), appropriate Employment Standards Branch, Workers’ Compensation Board, etc.

Independent Contractors

An independent contractor does not operate as part of the employer’s business. They provide specific services for a fee under a payer-contractor relationship:

Independent contractors act on their own behalf and many of them are incorporated. They often work for multiple businesses over time, submit invoices in order to obtain payments, and manage their own taxes.
In most cases, independent contractors do not participate in the Employment Insurance, Canada Pension Plan (CPP)/Quebec Pension Plan (QPP), or group benefits programs through their employer (payer).
Independent contractors are responsible for their expenses and may suffer a loss as a result of the working relationship (for instance, they may occasionally deal with bad debts).
If included in the contract, a payer-contractor relationship can only be terminated under specified conditions.

In certain circumstances, Canadian contractors may be considered “Dependent Contractors” and still be entitled to certain legal protections. Consider seeking legal advice or connect with your PEO Canada HR Advisor to learn more.

Regular Employees

In Canada, employment relationships are considered contractual and are governed by both employment standards (statue law) and common law, even in the absence of a written employment agreement.

An employee carries out their duties under an ongoing employer-employee relationship.

An employee usually performs work for one employer, under their control and with their tools.
Employees receive their salary/wages documented on a pay cheque or statement of earnings.
Employees’ taxes and applicable deductions are managed by an employer and submitted to CRA along with the employer’s share.
Employment laws provide employees with some benefits and protections, such as minimum wage and overtime pay, vacation and holiday pay, job-protected leaves of absence, etc.
Upon employer-initiated termination, employees are entitled to severance under the applicable Employment Standards legislation and common law.

Fixed-term Contract Employees

If your business is looking to hire a worker for a project or short-term contract, and the specifics of the role do not meet the independent contractor definition, you may want to consider a fixed-term contract arrangement.

A fixed-term contract in Canada is a job agreement between the employer and employee that lasts for a specific period of time, with clear start and end dates. There is no limitation to the number or duration of fixed-term contracts that you can offer to an employee; however, placing employees on fixed-term contracts is recommended only in certain circumstances, such as:

When an employee is replacing someone on leave of absence, or
When an employee is hired to support a specific project, or
Where employment is dependent on uncertain funding or employee’s time-limited work permit.

It is important to note that that if an employee continues to work past the expiry date of their fixed-term contract, the contract will typically convert into an indefinite employment. Consider consulting your legal team or PEO Canada HR Advisor for assistance in drafting a termination clause that limits your obligations in the event you need to end the contract before its scheduled expiry date.

6 Factors for Determining an Employment Relationship:

The determination of employee or contractor status often requires a case-by-case assessment and can be complex. The chart below shows some of the key factors determining if a worker may be considered an employee or a contractor:

	Employees	Independent contractors
Employment status	Employees usually work for one company as part of an ongoing employer-employee relationship.	Independent contractors can work for many clients or companies.
Control Over Work	An employer controls how, where, and when the work is performed.	Independent contractors determine their own work methods and schedule.
Payment	An employee will be paid through the Company’s payroll and have deductions for Income Tax, EI, and CPP/QPP managed by an employer.	Independent contractors should be paid by invoice from a budget that is separate from payroll. There will not be tax or employment-related deductions. The contractor is responsible for paying those separately.
Tools and equipment	The employer typically provides employees with the necessary tools and equipment for the job. The employer is also responsible for repair, maintenance. and insurance costs associated with those tools/equipment.	Independent contractors usually utilize their own tools and equipment to complete assigned work. They are also accountable for costs of repairs, maintenance, and insurance.
Benefits and Insurance	Employees are covered under the company’s business insurance and their Worker’s Compensation Board (WCB). They are often eligible to participate in the employer’s extended benefit plan that includes health, dental, and life insurance coverage.	Independent contractors are responsible for providing their own insurance.
Subcontractors and assistants	Employees are obligated to personally perform their job duties.	Independent contractors can hire third-party service providers to complete or assist with completing the assigned work.

If the worker has a financial investment in a business and is at risk of incurring a monetary loss, this is a strong indicator of an independent contractor relationship. If there is no risk of loss to the worker, this is typically indicative of an employment relationship.

In the case that a worker is misclassified, both the individual and the company who hired them could face penalties for not properly contributing to income tax and associated revenue, like the Canada Pension Plan – CPP or the Québec Pension Plan QPP.

It is also important to remember that when assessing and weighing the evidence, the total working relationship must be examined. There is no one factor that is determinative on its own. The process may vary depending on the jurisdiction, particularly in the province of Québec.

This information is not intended to replace or qualify as legal advice, but to emphasize the importance of proper classification of a worker’s employment status. If you have have any further questions or would like to explore this topic further, please reach out to your PEO Canada HR Advisor, consult applicable employment standards, or connect directly with Canada Revenue Agency for further assessment. Our PEO Canada HR team can also assist with referrals to trusted legal partners should you seek a more fulsome legal assessment.

Getting this right from the start is not just about compliance, but also about ensuring smooth business operations and building a strong Company brand.