Employment vs Independent Contractor

By Sean Stevenson – Latest Revision April 5th, 2021

Employment vs Independent Contractor – Know The Difference

Whether you’re a business owner or an enterprising employee, you may be wondering how to classify your occupation.  Understanding if you are considered employed or independently contracted is a matter of categorizing the work you do.

This distinction can be easy to overlook or ignore entirely.  However, the implications for both a person’s work-related benefits and Employment Insurance (EI), are drastically influenced by how they are categorized as a worker.  Moreover, Canadian legislation treats employed and independently contracted workers differently for taxation purposes.

Obviously knowing the differences between the two is supremely important if you want to ensure you are receiving all the benefits you are entitled to!

Below are some key components that will help you understand and differentiate between typical employment vs independent contractor work.

Key Components For Consideration:

1. Financial Risks Involved

With any opportunity, there are always certain risks involved. 

For instance, the opportunity to make significant profits as an independent contractor are offset by the inherent risks involved.  Should the business fail, the obligations of business ownership and operating costs can prove a financial hardship. 

This scenario alone would give credence to the statistics that suggest most startups ultimately fail within the first few years of their existence.

Comparatively, an employee will have little to no real financial risks associated with their job.  As they are not responsible or financially liable if they fail to fulfill their duties, they will at worst be terminated from their position.  This offsetting of risk can prove advantageous to some individuals.

It should be noted that while an employee position has less risk involved, they also do not have the same opportunity to attain higher profitability when compared with an independent contractor. 

This is because an employee trades their time for their profits.  Time being a finite resource, means that an employee will be involuntarily “hard-capped” against a certain number of profits being made each year.  Whether by salary, or by hourly pay, there will be a maximum amount conferred to the employed individual.

Contrarily, an independent contractor makes money by increasing their productivity, networking, marketability, and the overall commissions received from customers.  This is to say that an independent contractor has the advantage of being able to create more wealth through their own enterprising efforts.  Moreover, since they are their own “boss,” their only limitation is their personal capacity to provide excellent products or services to interested customers.

This can spell huge opportunity for driven contractors who thrive as independent workers.

Key Takeaways

  • An employee typically has more job security than an independent contractor.
  • An independent contractor who proves successful can reap significant monetary rewards.
  • Both employees and independent contractors have certain advantages that should be carefully reflected upon.

2. Level of Control

The Canadian Revenue Agency (CRA) has defined control as, “… the ability, authority, or right of a payer to exercise control over a worker concerning the manner in which the work is done and what work will be done.”

Thus, it becomes clear that control is a matter of understanding the relationship between the paying party and the subordinate worker. 

When observing control in a workplace, focusing on the payer’s control over daily activities, and the influence exerted over the workers themselves is key.  This grants an understanding of the working relationship and contract as it exists.

For the most part, a healthy employee-employer relationship is based on sustainability, loyalty, respect, subordination, and security. 

Yet in scenarios where there is no direct subordination, the worker in question is more likely to be considered as self-employed (otherwise known as an independent contractor).

Key Takeaways

  • Control in a workplace tends to be more focused on the employees themselves.
  • An independent contractor will have much more autonomy to carry out their obligations for the paying party.
  • An employer can make use of both direct employees and independent specialists to complete projects on time.

3. Ownership of Equipment and / or Tools

The CRA also uses the ownership of tools and equipment as a factor for further consideration. 

In the case of an employee, any equipment and tools required will be provided by the employer.  Should any maintenance or need for insurance arise, these will again be handled by the employer.

In essence, the employee has no stake or capital investment in the operations of the company.

The opposite is true for the independent contractor.  These self-employed individuals must supply their own equipment and tools as needed in order to complete a contract.  Any insurance requirements or repairs must also be dealt with by the self-employed contractor. 

Any further requirements for maintenance of equipment, or even a workspace, must also be taken care of by the independent contractor using their own capital.

Key Takeaways

  • Employees are given the tools and equipment necessary to complete their routine tasks.
  • Independent contractors must supply their own equipment, tools, and even workspaces if necessary.

4. Subcontracting Workers and Assistants

Another key component used to analyze the distinction between workers, is whether or not the individual being assessed can subcontract their work to others.  This includes hiring any work-related assistants.

Subcontracting to others is often seen as increasing the risk involved while fulfilling a contract.  Working with untested and relatively unknown subcontractors can prove disastrous.  Moreover, there is now increased “out of pocket” expenses required to pay these individuals.

Despite the inherent risks involved, it can prove worthwhile to an independent contractor to pay for additional assistance.  More work can be completed in a shorter timeframe.  Further, technical experts can be subcontracted who may be skilled in specific tasks or specialized techniques.  This can greatly advance the resultant efforts, enhancing the overall quality of work performed.

Conversely, an employee must see to their obligations personally.  They cannot hire any replacements, additional help, or assistants, whatsoever. 

Key Takeaways

  • An independent contractor can hire additional help for difficult or lengthy tasks.
  • An employee must rely exclusively on their own efforts to fulfill their routine obligations.

5. Management and Investment

The CRA strongly considers the responsibilities, investments, and managerial aspects held by each category of work taking place.  The resultant considerations made have strong tax-related implications.

For example, an employee will not have any capital investments in the business they work for.  This means no capital gains are possible from regular work-hours.

As opposed to a standard employee, a self-employed individual will have invested their own capital into their own business.  This capital will provide for any equipment, office space, or marketing they might require.  They will also likely have a staff they actively manage, along with subcontractors they routinely hire to assist with ongoing projects.

Investments such as these can yield significant rewards over time.  Real-estate purchases made by a business -for example- can later be sold for a premium cumulative return.  

Key Takeaways

  • An employee will not have any capital investments, staff, marketing, or office space to manage.
  • A self-employed or independent contract is likely to have all of the above (and perhaps more).

Benefits of Hiring Independent Contractors Vs Employees

Many employers actively question the need for hiring independent contractors.  Often, they feel that their own employees are more predictable and hard-working, making them easier to manage.

Despite this outlook, there are nonetheless significant benefits for hiring independent contractors as opposed to employees.  Some of these benefits include:

  • There is no training timeframe required for independent contractors.  They come equipped with the tools and experience necessary to get the job done.
  • Employers of independent contractors avoid much of the bureaucracy associated with managing full-time employees.  There is no payroll, vacation pay, income tax, EI, or CPP to consider when employing independent contractors.
  • Independent contractors also do not get benefits or pensions from their employers. 
  • In general, there is significant affordability in hiring skilled contractors locally.  This creates flexibility of labor costs, allowing an employer to meticulously manage their needs and expenditures over time.

While these benefits are certainly attractive, it should be noted that if the contractor were to be hired on permanently, there are significant consequences that must legally ensue:

  • Any outstanding EI premiums and CPP must be paid.
  • The employer must settle any unpaid taxes and will likely be exposed to additional interest or penalties.
  • Any business expenses that were deducted by the contractor must be repaid in full.
Employment vs Independent Contractor

These factors display the importance of clearly defining your status as an employee or an independent contractor.  The ramifications involved are significant for income, benefits, and even taxation purposes.

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