Employee or Independent Contractor? The Six Factors Courts Use to Decide

Some employers might see classifying workers as independent contractors as a simple cost-cutting measure, by avoiding CPP and EI contributions, vacation and holiday pay, benefits, and payroll administration. However, the benefits to the employer are short-lived and the risks are serious. Misclassifying workers can lead to fines, litigation, and back pay claims that will often far exceed the benefits gained from that misclassification.

Most employers seem to think worker classification is simple: if a worker signs on as an independent contractor, they assume the issue is settled. However, neither the law nor the way our courts see it is that simple. Courts look at the actual relationship between the parties, and if that relationship points to “employee,” no contract alone is going to protect you.

There is no single, universal test. Instead, courts look at the overall relationship to answer one key question: Is the worker truly running their own business, or are they effectively working for someone else? To help answer that, courts look at six key factors.

Factor 1: Control over the Worker

The level of control a business has over a worker is one of the clearest indicators of employee status. If the business is deciding not just what needs to be done, but also how, when, and where the work is performed, that starts to look a lot like an employment relationship. Independent contractors, on the other hand, typically have much more freedom. They generally decide how to deliver the final result, set their own hours, and choose how to perform the work, as long as the end-product meets agreed-upon expectations. If the independent contractor is receiving day-to-day supervision and ongoing direction, that begins to resemble an employee relationship rather than an independent contractor one.

Factor 2: Ownership over Tools and Equipment

Another important difference between employees and independent contractors is ownership of the tools, technology, or equipment used to complete the work. Employees typically use tools, and other resources that were provided and paid for by the employer, including computers, software, machinery, or even workstations. Independent contractors, by contrast, usually bring their own tools and cover the costs to maintain them. This matters because it speaks to independence: when someone pays for, uses, and controls their own equipment, it suggests they’re running their own business, not simply filling a role within someone else’s business.

Factor 3: Ability to Hire Others

Independent contractors usually have the right to delegate work or hire their own help. They generally determine how the job is completed, including bringing in other people to help when necessary. Employees have limited authority in that they typically are expected to do all the work themselves in the role defined by the employer. Therefore, if a worker has the authority to hire their own team or subcontract parts of the work, this is considered strong evidence of independent contractor status.

Factor 4: Financial Risk

One of the biggest indications about a worker’s status is who absorbs the risk. Most employees get paid the same, regardless of the company performance or how hard they work at their job. Independent contractors assume the risk that the project could take longer, cost more money, or that they may not get paid on time or at all. They may also invest in supplies or marketing upfront to secure new work or potentially absorb a loss if a project doesn’t go as planned. Taking on a financial risk is a solid indication that someone is operating their own business. Unlike employees, who usually do not incur business-related costs or losses, independent contractors must manage these risks themselves.

Factor 5: Investment and Management Control

It is also necessary to evaluate how or if a worker invests and operates its own business resources. For example, independent contractors often spend their own money on tools, marketing or a place of work, and have the authority to determine how to run and grow their business. They are not just offering their time; they are operating a business. In contrast, employees typically do not have this responsibility. Employees are generally hired to do a specific role as a part of a business, with limited or no management or financial responsibility.

Factor 6: Profit Opportunities

Finally, independent contractors generally have opportunities to grow their income by working more efficiently or taking on additional clients. They can increase their income not just by working faster, but by getting a better rate, using an alternative client base, or making other beneficial decisions for their business. While employees may receive bonuses or performance-based raises, these are typically tied to the employer’s policies and do not stem from business decisions made by the worker. The opportunity for profit is another major sign that a person is really operating their own business.

Protecting your Business

No single factor determines whether someone is an employee or an independent contractor. It’s the totality of the circumstances that matters. Courts and regulatory agencies look at how these factors interact in the real-world working relationship. Importantly, it’s not just what’s written in a contract that counts, but how the work is actually performed day to day. These factors are intended to assist employers in making smart classification decisions that protect their business and workers, and limit their legal risk.

If you have doubts about your worker classifications or would like assistance with reviewing your contracts and practices, please don’t hesitate to contact us.