What is the Difference Between an Employee and an Independent Contractor?

Dec 17, 2020
5 minute read

As a business grows, entrepreneurs may start considering extra help but aren’t sure where to turn. Do you hire employees or independent contractors? What’s the difference?

It turns out that there’s a big difference, not just for the worker whose help or services you’ve hired them for, but for your business. 

Independent contractors also may be faced with deciding if the work they’ve been hired to complete puts them in a position of employee or independent contractor. 

It’s important to make sure you know the key differences between employees and independent contractors. That’s where Ownr can help. 

Why classifying workers matters

Classifying workers is as important as invoicing and collecting a paycheque. What type of worker you’ve solicited or classified is necessary to set out before any work commences. This directly affects one’s eligibility for employment insurance (EI) and where they fall under employment legislation such as the Canada Pension Plan (CPP), the Income Tax Act, or disability claims. 

An employer must remit to the Canada Revenue Agency (CRA) all CPP contributions, tax deductions, and EI premiums on each paycheque. A business that has hired an independent contractor does not. Independent contractors invoice for services provided and must pay their own taxes. 

Definition of employees and independent contractors

The CRA website gives clear definitions of what constitutes an employee and a self-employed independent contractor. There are indicators of what constitutes an employee and a self-employed contractor, but there are always exceptions.

Employee

An employer/employee relationship is generally a subordinate one where the employee is:

  • Generally not responsible for the costs of running the business.
  • Not exposed to a time constraint of the worker/employer relationship until employment is officially terminated.
  • Not legally liable for business operations or finances.
  • Not the determinant of salary and work schedules.

Independent contractor

The business relationship between an independent contractor and a business owner is considerably different and is identified by:

  • The relationship is not ongoing, but rather, the contractor is hired (or contracted) to do a specific job.
  • The contractor does the majority of the work on their own premises and is self-directed. 
  • The contractor is financially liable for their own business.
  • A contractor does not receive any pension or group benefits and must file their own tax contributions.

Employee advantages

As an employee, some advantages are desirable to certain types of workers. Employees are generally afforded more job security than independent contractors and do not have to look for work. They don’t need to be quite self-directed as self-employed contractors and often work steady and regular hours. This is advantageous for individuals who have other life responsibilities that require steady hours, such as family rearing or other caregiving. 

As a business owner, it can be difficult to hire employees and can often be a point of indecision. There are tools that can help you choose the right employee for your business.

An employee is also eligible for EI, CPP, and other group benefits through their employer, if the employer offers this.

Employee disadvantages

The disadvantages of being an employee are often the reasons why some turn to entrepreneurship. There is very little flexibility in a traditional employment relationship, which may lead to reduced independence and control over who you work with. 

An employee is generally not eligible for any profits the business might make. There are some employers who offer bonuses, but this isn’t mandatory. 

Self-employment advantages

The advantages to self-employment can be desirable to some and conducive to a more flexible lifestyle… sometimes. It’s important to note that new business owners may have to put in a lot of extra time and hard work to get their busine