Whether you’re growing your business or bringing in specialized help, deciding whether to hire someone as an employee or an independent contractor is crucial. The distinction goes far beyond contract wording. It affects taxes, legal obligations, workplace rights, and your exposure to liability.

Misclassifying a worker can result in significant financial consequences, such as retroactive payroll deductions, penalties, or even wrongful dismissal claims. On the other hand, choosing the right structure can give your business greater flexibility, cost control, and protection.

This guide explains how the law distinguishes employees from contractors, what each structure means in practice, and how to make the right choice for your business.

What Makes Someone an Employee?

Employment relationships in Alberta are governed by the Employment Standards Code, which sets the minimum protections for employees. These protections include:

• Termination notice or pay in lieu
• Sick leave and bereavement leave
• Vacation pay and general holiday pay
• Limits on hours of work and overtime entitlements

Employers must also deduct and remit Income Tax, Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums

What this looks like in practice

Employees typically:

• Work on a set schedule
• Use the employer’s tools and equipment
• Follow the employer’s processes and direction
• Receive consistent wages or salary
• Rely primarily on the business for income

Advantages for the business

Hiring an employee gives the business a higher level of stability and control. Employers can direct how, when, and where the work is performed, ensuring consistency in service delivery and alignment with internal processes. Employees are also generally more available and integrated into the day-to-day operations of the company, which supports continuity and long-term planning. 

Employment relationships offer stronger protection for intellectual property and confidential information, since employees are legally obligated to follow workplace policies and act in the employer’s best interests.

Limitations

Employment agreements offer less flexibility. Changes to duties or compensation must still meet minimum standards, and courts scrutinize restrictive covenants (like non-competes or non-solicits) closely. If these clauses are too broad, they are often struck down.

What Makes Someone an Independent Contractor?

Independent contractors operate their own business. They are hired to provide services but are not employees.

Contractors typically:

• Use their own tools and methods
• Control how and when the work is done
• Invoice the business for services
• Set or negotiate their own rates
• Pay their own taxes and source deductions
• Work for multiple clients

When contractor arrangements work well

This structure is ideal when the work is project based, seasonal or specialized. Ultimately, contractor relationships are not central to the day-to-day operations of a business. Instead, they are brought in to deliver specific expertise or results, often on a defined timeline, without becoming part of the company’s core workforce. 

Contractors operate with a high degree of independence, allowing businesses to scale up or down as needed while maintaining flexibility and controlling long-term employment obligations.

Why businesses choose contractors

• No obligation to provide benefits
• No CPP, EI, or income tax deductions
• Easier termination
• Lower administrative burden

Contractor agreements allow more enforceable restrictions

Courts generally enforce non-competition and non-solicitation provisions more readily in contractor agreements than in employment contracts, provided the restrictions are reasonable and protect legitimate business interests.

 

Important note

Providing voluntary benefits (like extended health plans) does not automatically turn a contractor into an employee, as long as the overall relationship maintains contractor independence.

How the Law Actually Decides: The Control and Independence Test

A worker is not a contractor just because the contract says so. The CRA and Employment Standards apply a holistic test that looks at the true nature of the relationship. Key factors include:

Control

Who determines how, when, and where the work is performed?

Tools and Equipment

Does the worker use their own tools, technology, or equipment?

Chance of Profit / Risk of Loss

Is the worker running a business that could profit or lose money?

Integration

Is the worker part of the core business or an independent service provider?

Ability to Subcontract or Hire Assistants

Can the worker delegate the work to others?

Financial Structure

Does the worker invoice, charge GST, and manage their own taxes?

No single factor is decisive. It’s the substance of the relationship, not the label, that determines the outcome.

Why Misclassification Is a Serious Risk

Misclassifying someone as a contractor when they are legally an employee can lead to:

• Retroactive CPP/EI contributions
• Penalties and interest
• Liability for unpaid vacation, overtime, or termination pay
• Liability for wrongful dismissal
• Human rights complaints
• Workers’ compensation consequences
• Contract disputes

Real-world example

A business hires someone as a “contractor” but:

• requires them to work 9–5,
• provides all tools,
• supervises their work, and
• prohibits them from taking on other clients.

If the worker later files a complaint or claim, they may be ruled an employee regardless of what the contract said.

Employees vs. Contractors: Key Differences at a Glance

Factor	Employee	Contractor
Control over work	Employer directs how, when, and where work is done	Contractor chooses how and when work is completed
Tools and equipment	Provided by employer	Provided by contractor
Risk and reward	Minimal risk; predictable wage	Contractor assumes risk; potential for profit
Legal protections	Covered by Employment Standards, WCB, and human rights legislation	Fewer protections; governed by contract law
Tax treatment	Employer deducts CPP, EI, and income tax	Contractor handles their own taxes and GST

How to Choose the Right Structure

When deciding whether to hire an employee or contractor, consider:

• How much control you need
• Whether the work is ongoing or project-based
• Whether the worker will be integrated into the business
• Your administrative capacity
• Tax and payroll implications
• Long-term plans for the business

The wrong choice can be costly, but the right structure can improve efficiency, reduce overhead, and provide much-needed flexibility.

 

How to Protect Your Business

To minimize risk:

Use a well-drafted agreement

Employment and contractor agreements should reflect the true nature of the relationship, not just the label.

Align day-to-day conduct with the contract

If you treat a contractor like an employee, the law will too.

Consult legal counsel early

A short review can prevent expensive disputes, CRA assessments, or misclassification problems later.

Final Thoughts

There is no universal rule for choosing between employees and independent contractors. Each option carries its own advantages and obligations. Understanding the legal differences and documenting the relationship properly helps your business operate confidently and avoid costly mistakes.

If you need help drafting or reviewing employment or contractor agreements, our team here at Du Plooy Law can guide you through the process and ensure your contracts align with your business goals.