Independent Contractor vs. Employee in Ontario: The Legal Test Explained

When you hire a web designer, project manager, or part-time assistant, getting their classification right is crucial. Misclassifying an employee as an independent contractor can lead to major tax penalties, wrongful dismissal claims, and regulatory exposure.

What Is the Legal Test for Classification?

In Ontario, and under Canada Revenue Agency (CRA) rules, there is no single determining factor to decide whether someone is an employee or an independent contractor. Instead, courts and regulators apply a multi-factor test that considers the overall nature of the working relationship.

Key factors include:

• Control: How much control does your business have over when, where, and how the person performs work?

• Tools and Equipment: Does the individual use their own tools and equipment or rely on your resources?

• Chance of Profit and Risk of Loss: Can the worker make a profit or suffer a loss based on how they perform?

• Integration: Is the worker integrated into your business operations, or are they operating independently?

When a relationship shows high control, heavy integration, and little exposure to risk, it is more likely to be seen as employment rather than contracting.

Why Misclassification Is a Serious Risk

Calling someone a contractor on paper does not protect you if reality suggests otherwise. If courts or regulatory authorities find that the relationship was more like employment, your business could face consequences such as:

• Payment of back wages, overtime, vacation pay, and public holiday pay

• Mandatory contributions to CPP (Canada Pension Plan) and EI (Employment Insurance)

• Severance and termination obligations

• Liability for WSIB (Workplace Safety and Insurance Board) insurance

• Penalties imposed by CRA for unpaid source deductions

Because the actual working relationship takes precedence over contractual labels, careful classification is essential.

What a Contractor Agreement Should Include

If you are engaging someone as a legitimate independent contractor, your agreement must reflect the true nature of that relationship. A contractor agreement should clearly state:

• The scope of services to be provided

• The payment structure and schedule

• That the contractor is not entitled to employment benefits or rights

• That the contractor will use their own tools, methods, and schedule

• The termination terms applicable to both parties

These provisions should accurately reflect how the relationship is working in practice, not just on paper.

How Delta Law Can Help

At Delta Law, we help Ontario businesses reduce the risk of misclassification by:

• Reviewing your working relationships and advising on proper classification

• Drafting contractor agreements and employment contracts that reflect legal reality

• Ensuring compliance with CRA, ESA (Employment Standards Act), and relevant regulations

• Educating clients in clear language to avoid misunderstanding

If your business has not reviewed how it classifies workers, you may already be exposed to significant liability.

Book a Consultation to discuss your contractor and employment relationships with an experienced Ontario employment and contract lawyer.