Understanding the distinction between an independent contractor and an employee in Canada is crucial for both workers and businesses. This differentiation affects legal rights, tax obligations, and the application of employment laws. In this comprehensive guide, we will explore what defines an independent contractor, how they differ from employees, and examine key legal cases and acts, such as McCormick v. Fasken Martineau DuMoulin LLP and the Employment Standards Act.
What is an Independent Contractor?
An independent contractor is someone who provides services to another entity under terms specified in a contract or within a verbal agreement. Unlike employees, independent contractors usually operate as their own business and have the freedom to control how their work is completed. They are responsible for their own taxes, benefits, and business expenses.
Key Characteristics of an Independent Contractor
- Autonomy: Independent contractors have the liberty to decide how, when, and where they work.
- Financial Control: They often provide their own tools and materials and are responsible for their own profit or loss.
- Relationship: The relationship is usually temporary and based on specific tasks or projects rather than ongoing duties.
- Business Presence: They might have multiple clients and advertise their services to the public.
How is an Independent Contractor Different from an Employee?
The differences between independent contractors and employees are significant and have implications for both parties.
Employment Relationship
Employees work under a contract of service, which typically involves a continual relationship and job security. They follow the employer’s instructions and schedules and use the employer’s tools and resources. In contrast, independent contractors work under a contract for services, meaning they have more control over how they carry out their work.
Tax and Benefits
Employees have income taxes, Employment Insurance (EI), and Canada Pension Plan (CPP) contributions deducted from their pay by the employer. They may also receive benefits such as health insurance, vacation pay, and sick leave. Independent contractors, however, are responsible for their own taxes and do not receive traditional employee benefits.
Legal Protections
Employees are covered by employment laws that guarantee minimum wage, overtime pay, and other workplace protections. Independent contractors do not have these protections and must rely on their contracts for any dispute resolutions.
Legal Case: McCormick v. Fasken Martineau DuMoulin LLP
The landmark case of McCormick v. Fasken Martineau DuMoulin LLP highlighted the complexities of distinguishing between employees and independent contractors. The Supreme Court of Canada addressed whether a partner in a law firm should be considered an employee for the purposes of age discrimination.
Case Overview
John McCormick, a partner at Fasken Martineau, argued that the firm’s mandatory retirement policy was discriminatory. The court had to decide if McCormick was an employee or an independent contractor. The decision ultimately rested on the degree of control and dependency in the working relationship.
Court Decision
The Supreme Court ruled that McCormick was not an employee, as partners in a law firm typically have significant control over their work and share in the profits and losses of the firm, indicating a lack of dependency typical of an employee-employer relationship.
Employment Standards Act and Independent Contractors
The Employment Standards Act (ESA) is a key piece of legislation that sets out minimum standards for employees in areas such as wages, hours of work, and termination. However, it generally does not apply to independent contractors.
Understanding the ESA
The ESA provides protections for employees, including minimum wage, vacation pay, and parental leave. Employers must comply with these standards, but independent contractors are not covered by the ESA, as they are not considered employees.
Implications for an Independent Contractor
While independent contractors are not entitled to ESA protections, they benefit from the flexibility and independence of being their own boss. However, this also means they must navigate contracts carefully and ensure that their rights and responsibilities are clearly defined.
Determining Worker Status
Determining whether someone is an independent contractor or an employee involves examining the nature of the working relationship. Key factors include:
- Control: Who directs the work and how it’s done?
- Ownership of Tools: Does the worker provide their own tools and equipment?
- Financial Risk: Does the worker have the potential to make a profit or incur a loss?
- Integration: Is the worker an integral part of the business?
Best Practices for an Independent Contractor
For those working as independent contractors, there are several best practices to consider:
Draft Clear Contracts
Ensure that all agreements are documented in a clear, comprehensive contract that outlines the scope of work, payment terms, and responsibilities of each party.
Maintain Financial Records
Keep detailed financial records, including invoices, receipts, and expenses, to simplify tax filing and demonstrate the independence of the business.
Understand Tax Obligations
Independent contractors must manage their own tax obligations, including GST/HST registration and remittance, and should consider working with a tax professional to ensure compliance.
Conclusion: Independent Contractor
Understanding the distinction between independent contractors and employees is essential for both individuals and businesses in Canada. This classification affects legal rights, responsibilities, and financial obligations. By recognizing the characteristics and implications of being an independent contractor, individuals can better navigate their careers and protect their interests.
For businesses, it is crucial to correctly classify workers to avoid legal issues and ensure compliance with relevant laws. Both parties should strive for clear communication and well-defined contracts to foster successful working relationships.

Faisal completed his Juris Doctor from University of Ottawa. He has extensive work experience at Deloitte, Scotiabank and CIBC. Faisal’s approach is grounded in a commitment to his clients’ objectives. He understands how frustrating the court process is for clients and fights to get you the best settlement possible.