What is the Difference Between an Employee and an Independent Contractor?
Simply put, employees work for someone else while independent contractors are in business on their own account.
It is important to know whether you are an employee or a contractor because someone misclassified as a contractor who is actually supposed to be an employee may be liable to pay applicable taxes for as long as they were wrongly classified. This can affect both individuals and businesses drastically.
It is also very important to know that someone is not necessarily a contractor just because they have signed an agreement which says they are. What makes someone an employee or a contractor is the overall relationship they have with the person/company they are doing work for.
Are you wondering what the difference between an employee and an independent contractor is? We offer a free tool which will help you determine how your work should be classified.
Do you want to know why it is important to know whether you’re an employee or a contractor? Read on to understand the financial implications.
Why Would I Want to be an Employee?
Employees are “safer” than contractors. Employees are protected by provincial legislation such as the Employment Standards Act in Ontario that sets out specific rights that every employee must have.
This includes things like minimum wage, vacation, and reasonable notice. These protections are not legislatively afforded to contractors.
Why Would I Want to be a Contractor?
Choosing to be a contractor usually comes down to freedom of choice. A contractor is generally their own boss and has more freedom to run their business as they wish. Contractors can come and go as they please and only need to answer to the clients who pay their wages, rather than a boss who may breathe down their neck.
Tax breaks may be another reason one would want to be a contractor. Contractors are not usually paid a traditional salary so they may be entitled to tax breaks and write-offs that employees do not get. But this is a complicated matter and should be thought about carefully.
For more specific advice, consult a business lawyer or business law clinic in your jurisdiction.
Tip 1: Ask who controls the work
Control of work comes down to two things: supervision and delegation of tasks. Ask yourself, does someone supervise my work on a daily basis or provide me with regular performance reviews? Does someone tell me every task that I need to do?
Answering “yes” to either of those questions points in the direction of someone being an employee. If you have a boss telling you what to do and how to do it, then you are less likely to be in business on your own account and are therefore less likely to be a contractor.
Tip 2: Look at where the “tools” came from
The “tools” refer to anything that is required to perform the work. This could include a car, computer, software, construction tools, etc.
Someone who is required to bring their own tools is more likely to be a contractor. On the other hand, if you choose to bring some tools but are not required to, this likely points to an employment relationship.
For example, mechanics will often choose to bring their own tools even though the auto-shop they work for will supply what they need. These people are likely still employees.
Tip 3: Focus on payment structure
There are a lot of ways that someone can get paid. An hourly wage is the most common for employees. Contractors will often be paid in a way that reflects the work they do.
For example, being paid on commission or being paid only after completing certain tasks would suggest a contractor relationship.
Tip 4: Determine who controls where and when work is performed
Who sets the number of work hours? Who sets when the work is performed? And who decides where the work is performed?
Uber, for example, argues that their drivers have the flexibility to set when they work, where they work (within reason), and how often they work. This is not to say that Uber drivers are automatically considered contractors, as there is currently pending litigation on this issue. However, these factors point in the direction of someone being considered a contractor.
Tip 5: Ask who “owns” the clients
This one is more subjective and often depends on the type of work. If you are a massage therapist, for example, you might ask yourself if the clients you see are considered to belong to you or to the clinic you perform services out of. This may also be answered by looking at your contract.
It is important to note that these tips are not exhaustive criteria and that judges make decisions by weighing all available information in each specific case. The best practice is to be very careful when agreeing to perform services as a contractor, and thinking carefully about the working relationship that you are about to form.
If you have questions it is wise to check out our free online tool and consult an employment lawyer.