Contractor vs. Employee: What's the Difference?

If you’re running a business with a team or contractors, you’ve likely wondered how to classify them. It’s a bit more complicated than just picking a label. It’s about understanding the nature of the working relationship and what that means for your business and taxes. The CRA has some key factors that help determine who’s who, but don’t worry. This blog will shed some light on the difference and help you figure out if you’ve got any misclassified workers.

Why does it matter? Because how you classify your workers directly impacts your business and tax obligations. The main difference comes down to things like income tax, CPP, and EI. Employees also get benefits that contractors don’t, like vacation pay, public holiday pay, and legal rights around hours of work and termination.

No matter what side of the contractor/employer coin you’re on, keep on reading to learn how to steer towards proper classification.

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Factors of Employee Classification Explained

Before we dive in, keep in mind these factors are meant to be considered together. No single factor makes or breaks the classification. The goal is to get a sense of the overall working relationship, so even if one factor doesn’t scream “employee” or “contractor,” the other factors will paint a clearer picture. Here’s the breakdown of the six key factors:

Nature and Degree of Control Over Work

This one’s all about who’s calling the shots. If your company’s controlling how, when, and where the work gets done, things like the schedule, tools, and methods, you’re probably looking at an employee. So, if you’ve got a graphic designer who’s expected to be online during your office hours, use your company software, and follow a set schedule, that’s an employee.

Opportunity for Profit or Loss

This factor looks at whether the worker can influence their income. Independent contractors often work with multiple clients and have control over how much they earn. If the worker’s pay is set and they can’t increase or decrease their earnings based on their own decisions, that’s an employee setup.

Investment in Equipment or Materials

If someone is using their own tools, like software, a computer, or photography gear, they’re likely a contractor. Contractors typically cover their own equipment costs. If they’re using your tools or systems to get the job done, they lean more toward being an employee.

Skill and Initiative Required

Does the job require specialized skills or entrepreneurial effort? If yes, we’re probably talking about an independent contractor. So if you work with a website designer who’s creating custom solutions for different clients, you’re in independent contractor territory. Alternatively, if the work involves following set procedures without much room for personal initiative, like a customer service rep answering inquiries based on your brand policies and guidelines, that leans towards employee classification.

Permanency of the Relationship

How long and how tight is the worker-company bond? If it’s a long-haul, exclusive relationship, it’s leaning towards employee territory. A marketing consultant who’s been with one company forever and isn’t seeing other people, so to speak, is likely an employee. But if it’s a more casual, come-and-go relationship, like a graphic designer who hops between different clients and projects, that’s more in line with an independent contractor.

Extent to Which the Work is Integral to the Business

Is the worker’s role vital to the heart of the company’s operations? If so, they’re more likely to be considered an employee. For example, a cashier in a retail store or an operations manager at a product-based brand is integral to the business. However, a content writer creating blog posts for an agency may not be essential to day-to-day operations and could be classified as a contractor instead.

The Two CRA Considerations You Need to Know

The CRA also uses two additional factors to make sure the classification is accurate:

Control Test:

This test examines how much control the employer has over the worker's activities. Key questions include:

• Who decides how, when, and where the work is done?
• Does the worker have to follow company schedules or use company tools?
• Is the worker free to refuse work from the employer? 

Core/Integration Test

This test assesses how integral the worker’s services are to the core activities of the business. Key points include:

• Is the worker performing tasks that are central to the company’s main operations?
• Could the business function without the worker's role?
• Does the worker represent themselves as part of the organization or as an independent entity?

Correctly classifying your team isn’t just about ticking boxes for the CRA. It’s about setting your business up for success. Whether you’re managing contractors or hiring employees, understanding the rules ensures you’re protected and on the right track.

Debunking The #1 Myth About Hiring Employees

We hear this one all the time, and it’s probably the #1 reason why businesses avoid employee classification:

“But it’s so much more expensive to pay employees than contractors!”

Okay, so it might look like employees cost more than contractors at first glance, what with all the benefits and taxes. And there’s no arguing that hiring contractors is a lighter lift in the short term. Contractors are the quickest way to get things off your plate with the least amount of strategy and prep work on your end. But depending exclusively on contractors is not a growth-minded solution.

At first glance, employees might seem more expensive than contractors, especially when you factor in benefits and taxes. There’s no denying that hiring contractors is the easier, quicker option in the short term. They’re the fastest way to offload tasks without much strategy or preparation on your part. However, relying solely on contractors isn’t a sustainable solution for long-term growth.

The Truth: Employees Are An Investment In Your Business

Employees are a long-term investment in your business’s success. Unlike contractors, who are meant for specific, one-off projects, employees are there for the day-to-day and the bigger picture. They’re invested in the company’s goals, consistently bringing their best to the table. And let’s face it: the endless cycle of finding and training new contractors for every project gets expensive and exhausting. In the end, building a dedicated team of employees isn’t just smarter, it’s a more sustainable way to save time, money, and effort.

And if that’s not enough to convince you, here’s one last point: most savvy contractors already bake taxes and insurance into their rates. So, you’re likely already covering those costs by paying them to the contractor instead of directly to the government.

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