As is true in other areas in the world, independent contractors are incredibly common in Canada. They are, however, not without their substantial risks.
Generally speaking, many workers in the United States’ neighbor to the north don’t actually oppose being classified as independent contractors because of the favorable tax treatment that comes with it. Many small businesses favor them as well; the problems, however, begin when companies classify employees as contractors to reduce costs and obligations. And, as is also true in other countries, misclassified independent contractor risks are very real (read our Canada IPEO guide for a comprehensive look at the country’s employment requirements).
Independent Contractor Risks in Canada: Fine, Penalties, and Distinctions
Despite the inarguable benefits of employing independent contractors, there are serious financial risks for companies that classify contractors as traditional employees.
Often, companies are caught doing this when a review of an employment relationship occurs. A worker’s contract arrangement might be terminated, at which point they would seek an employment classification in order to gain termination or employment insurance benefits they wouldn’t otherwise have access to. Likewise, authorities in Canada are becoming increasingly proactive about finding misclassified employees. Regardless of where in Canada a company operates, it will likely be sanctioned with fines, back payments, interest on those back payments, and even public shaming if found in violation.
Some provinces (with Ontario as a prime example) have additional laws restricting and outright punishing this type of misclassification. Not too long ago, Ontario even experimented with placing the burden of proof to show that an independent contractor actually qualifies as that status on the employer. However, this was repealed in January of 2019 when a new government took over.
Still, Ontario has routinely pursued class action lawsuits against companies that have allegedly misclassified employees. There were five notable cases between 2015 and 2018, all with claims ranging from CAD 30 million to CAD 400 million. These numbers do not include the massive legal fees that the companies accumulated, nor the negative publicity that it is difficult to quantify.
The Differences Between an Employee and an Independent Contractor in Canada
Much of the problem stems from the fact that there is no single, universally agreed upon definition of “employee” or “independent contractor” in Canada.
Those who fall into the latter category get to enjoy certain tax advantages that those in the former do not; independent contractors, for example, tend to net higher earnings than employees who make similar gross earnings. Likewise, any business expense can be deducted, like the cost of a Wi-Fi connection if the independent contractor in question spends most of their time working from home.
An independent contractor also doesn’t have to pay into the Canadian Pension Plan (CPP) unless they specifically choose to opt in.
None of that is to say employees aren’t without unique benefits of their own, however. Benefits that employees in Canada are entitled to include, but are not limited to:
- Paid time off
- Holiday pay
- Pregnancy leave
- Parental leave
- Sick leave
- Family medical leave
- A termination notice
- Severance pay, depending on the area in which they are employed
Self-employed individuals can also opt into Canada’s Employment Insurance program as well, which could afford them similar employment insurance benefits as those that are employed by “employers”—should they meet the requirements when applying for employment insurance benefits.
Avoid Independent Contractor Risks in Canada with International PEO
The confusion surrounding proper worker classification (and the penalties that come with misclassification) is a large part of why many companies choose to work with a partner like an International Professional Employer Organization (PEO) when expanding overseas. By acting as your Canada Employer of Record, Velocity Global’s International PEO solution allows our expansion experts to hire employees on your behalf—eliminating the risks of misclassified independent contractors.
If you’d like more information about avoiding independent contractor risks in Canada, or if you’d to learn more about how Velocity Global’s International PEO solution can help you break into more than 185 markets, reach out to us today.