Independent/Dependent Contractors, Employees: What’s the Difference?

Independent Contractor

Although independent contractors often enter into a contract for services, this is not an employment contract and does not create an employer-employee relationship. Instead, an independent contractor is governed by a business relationship, the terms of which will usually be set out in a specific contract between the parties. This means that independent contractors are not entitled to employment-style benefits, and do not enjoy employee protections pursuant to the Alberta Employment Standards Code. Therefore, independent contractors are generally not entitled to benefits such as vacation pay, or termination notice.

In order to determine whether an individual meets the classification of “independent contractor” Canadian courts generally consider the level of autonomy enjoyed by the individual in question, as well as how much risk is borne by the individual for the services in question. Autonomy usually refers to the amount of exclusivity or control that an individual may have over the services provided. If the individual has primary control over services, including how and when they are provided, this will militate toward the classification of independent contractors. Furthermore, assuming most or all of the business risk (and subsequent reward) is another key factor in determining whether someone is an independent contractor.

Dependent Contractor

The classification of “Dependent Contractor” creates the most confusion for employers and employees alike, as it shares characteristics with both the employee and the independent contractor classifications. Although dependent contractors are also contract workers, they usually have an exclusive economic relationship with the company they provide services to, and generally do not contract with several different individuals or companies. Unlike independent contractors, dependent contractors do enjoy certain protections similar to employees under the common law. Courts have found that dependent contractors are entitled to reasonable termination notice and that these notice periods may be similar to or on par with the notice periods enjoyed by employees.

Employee

Courts have held that there is no set test for determining whether someone is an “employee” and that the totality of the relationship must be examined in order to determine whether someone is in an employment relationship or not. Generally, a court would look at factors such as the level of control a potential employee has over the business, the level of economic exclusivity, whether the employee bears the risk of operating the business, and whether the employee is required to provide their own tools. Employees are governed by employment standards legislation such as the Alberta Employment Standards Code which governs minimum entitlements for employees such as vacation pay, wages and reasonable termination notice.

Why is this Distinction Important?

The distinction between an independent contractor, dependent contractor, and employee is important because each classification gives rise to a substantially different set of rights and entitlements, as well as liabilities under the law. For example, an Employee would be entitled to the minimum standards set out in the Alberta Employment Standards Code including protections regarding pay, and the right to reasonable termination notice, whereas an independent contractor would not. Dependent contractors are subject to many of the same protections as employees, which can open employers up to liability, should they not understand this classification correctly.

How Can a Lawyer Help?

Understanding your employment classification is key when determining the types of rights, protections or entitlements available to you under the law. Furthermore, it is important to understand that these different classifications can change based on the nature of the actual relationship. Even if a contract defines someone as an “independent contractor” a court could look at the entirety of the circumstances (such as the level of control, economic dependency etc.) and determine that they are in fact a dependent contractor or even an employee under the law. In short, courts look at the fact, not the intention, when determining the classification of the relationship. Having a lawyer review the facts of your specific case can help determine whether you may be entitled to further entitlements under the law, despite your classification on paper. In addition, a lawyer can also review your contractor agreement at the outset, to help minimize any liability, and protect your rights.