What is an employee?

The Employment Standards Act (ESA) defines an employee as someone who performs work or provides services in exchange for wages. This includes those in training and homeworkers. Employees are entitled to ESA protections, including:

• minimum wage
• overtime pay
• vacation and public holiday pay
• notice or severance entitlements

Employees typically work under the direction and control of their employer, using employer-provided tools and following established hours and policies. A written employment agreement can help clarify expectations. However, courts may still examine the real nature of the relationship, regardless of what the contract says. If a worker performs the same duties, under the same conditions as your regular employees, they may be considered an employee, even if they’ve signed an independent contractor agreement.

What is a contractor?

Independent contractors operate under commercial law, not employment law. They’re self-employed and negotiate their own pay and terms. The ESA does not apply to contractors, which means:

• no entitlement to vacation pay, overtime or notice
• no statutory deductions like EI or CPP
• no WSIB coverage unless opted in

Contractors often provide services to multiple clients, use their own tools and manage their own business expenses and taxes. In exchange, they may deduct operating costs, claim HST input tax credits and benefit from flexible work arrangements. That said, these advantages often favour employers, who are not responsible for benefits, insurance or payroll deductions. 

A clear and well-drafted contractor agreement can help define financial responsibilities and limit risk, but it typically does not supersede legal definitions.

What is a dependent contractor?

Dependent contractors are self-employed workers who rely on one company for most or all of their income. Unlike independent contractors, they have less economic independence and are often treated differently in legal disputes.

Though not entitled to ESA protections, dependent contractors may qualify for reasonable notice if their contract is terminated. This classification is especially relevant in industries such as skilled trades or freelance work, where workers contract with a single company for extended periods.

Courts consider several factors when evaluating worker status, including control, exclusivity, financial risk and ownership of equipment. In unionized environments, notice periods may also be governed by collective agreements. For businesses, this means the need for more precise contracts and a stronger focus on risk management.

How to decide between a contractor and an employee

To determine employment status, the CRA and Ontario courts rely on common law principles that look at the working relationship, not just what’s in the contract. Employees typically work under the direct supervision of the employer. They follow set schedules, utilize tools and equipment provided by the company and rarely undertake work for other businesses. The employer covers costs such as training, insurance and statutory deductions (EI, CPP), and provides benefits where applicable.

Contractors, on the other hand, have more control over how and when they work. They typically bring their own tools, handle their own taxes and bear the financial risks associated with their business. Most also work with multiple clients and negotiate their own rates and timelines.

Why hire a contractor?

Hiring independent contractors can help your business stay agile. Contractors typically require less administrative setup, since you’re not responsible for employment insurance (EI), Canada Pension Plan (CPP) contributions or other statutory deductions. This strategy can lead to significant cost savings, particularly for small businesses or startups seeking to manage expenses effectively.

Contractors can generally start quickly, often with little training or supervision. They bring specialized skills, operate under their own business terms and handle their own taxes and insurance. This setup makes them ideal for short-term projects, seasonal demands or situations where you need temporary staffing without a long-term commitment.

You might consider hiring a contractor if your business:

• needs short-term help or project-based work
• operates seasonally or during peak periods
• wants to avoid onboarding overhead
• requires specialized skills for a limited time

Why hire an employee?

Hiring a full-time or part-time employee can provide long-term stability for your business. Employees are generally more invested in your company’s success and offer consistent performance. They’re also easier to train in company procedures and are more likely to support your workplace culture, especially in industries where collaboration, communication or customer interaction is critical.

Employees are entitled to protections under the Employment Standards Act (ESA), including the minimum wage, vacation pay and statutory leave. While this requires more administrative work, it also helps attract quality candidates who seek job security and benefits such as health insurance or paid time off. Consider hiring an employee when:

• work is ongoing and requires close oversight
• you want to build company culture and internal knowledge
• job duties must align with company policies or brand standards

Workplace safety and insurance requirements

Under the Workplace Safety and Insurance Act (WSIA), most employees have coverage through WSIB. Employers must register with the WSIB, pay premiums and report any workplace injuries. Contractors are not automatically covered. Unless they voluntarily opt in, they’re responsible for securing their own insurance. If an employer misclassifies an employee as a contractor, that employer may be liable for back premiums and fines. Correct classification protects both your business and your workers in the event of a workplace incident.

Misclassification risks

The law focuses on substance over form; what matters is how the relationship functions, not what the contract says. If you’re unsure, it’s worth getting legal advice to avoid costly errors. Improperly classifying an employee as a contractor can lead to:

• unpaid wages, vacation or overtime claims
• retroactive deductions for EI, CPP and WSIB premiums
• fines and legal penalties under the ESA
• wrongful dismissal claims and class actions

Correctly classifying workers as employees or contractors can help you stay compliant with Ontario labour laws and avoid costly legal risks. Each classification comes with specific responsibilities, rights and tax obligations. Taking the time to review roles and draft clear agreements can protect your business and build stronger working relationships.