Information on legal and business topics from Canadian business lawyer Shane McLean

Contractor or Employee?

Posted by Shane McLean on October 19, 2009

Here’s a variation on  a common question that I get asked:  “I have [name] working for me as a [position].  Is he/she a contractor or an employee?”

Without knowing any further information I can say that, odds are, legally speaking the person is probably an employee.   I would, of course, ask for more information before providing the appropriate advice, but the fact that I am being asked the question in the first place tells me a lot.

At a basic level, whether they can articulate it or not, people generally understand when someone is a contractor or an employee.  For instance, nobody ever asks me if the plumber they had in the office for an afternoon last week to fix the lunchroom sink is an employee.  That’s because everyone understands that to be a  true contractor relationship.  The plumber provides their own tools and expertise,  takes direction from you on what to do but probably not how to do it and  works for multiple clients in a given day or week.    That’s a contractor.

Now, if you have someone who works 9 to 5 for you every day in a cubicle at your office and doesn’t perform services for others, that’s probably not a contractor for the  purposes of tax and employment law.    Most people understand this intuitively.

The question I quoted above is usually asked when someone who sounds more like a 9 to 5 employee approaches the company and asks to be treated as a contractor, usually because they want to take tax deductions that an employee cannot take.  It also comes up when trying to end a relationship with a contractor.   At the point of termination, contractors are  traditionally  at a disadvantage when compared to employees because they haven’t had the same level of legal protection in terms of notice and severance rights.  For that reason, it is not uncommon for “contractors” to have a change of heart at the point of termination and claim that they have in fact been “employees” for the entire time.    In the past couple years courts in Canada have been  moving toward eliminating the historical distinction between contractors and employees when it comes to “reasonable notice” of termination.  That will be the topic of a future post.

By the way, it doesn’t matter what you call yourselves.  You can have an agreement called a “Contractor Agreement” in which the parties scream loud and clear that they are not forming an employment relationship, but that won’t stop the  people who want to collect taxes or enforce employment laws from calling it an employer-employee relationship.


One Response to “Contractor or Employee?”

  1. Tax Lawyer said

    I’ve been active in taxes for longer then I care to acknowledge, both on the individual side (all my employed life story!!) and from a legal viewpoint since satisfying the bar and pursuing tax law. I’ve supplied a lot of advice and rectified a lot of wrongs, and I must say that what you’ve posted makes impeccable sense. Please persist in the good work – the more people know the better they’ll be armed to deal with the tax man, and that’s what it’s all about.

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