Independent Contractors vs. Employees in Alberta

Classifying a worker as an independent contractor or an employee is a crucial employment law distinction with significant legal and financial implications for both businesses and workers. Misclassification can result in serious consequences, including back pay for wages, unpaid benefits, tax liabilities, and penalties. Understanding the key differences between these two classifications can help employers and workers navigate employment relationships effectively and in compliance with the law.

What Is an “Employee” in Alberta?

An employee is an individual who works under the direction and control of an employer, often within an ongoing relationship governed by an employment contract. Under Alberta’s employment laws, employees are entitled to various legal protections, including those outlined in the Employment Standards Code and the Alberta Human Rights Act.

Key characteristics of an employee include:

• Control and Supervision: The employer dictates how, when, and where the work is performed.
• Integration: The worker is an integral part of the employer’s business rather than operating independently.
• Provision of Tools and Equipment: The employer typically provides the tools, equipment, and materials necessary for the job.
• Financial Dependence: Employees receive a set wage or salary, often with benefits such as vacation pay, statutory holiday pay, and employment insurance (EI) coverage.
• Exclusive Service: Employees often work exclusively for one employer, subject to any restrictions outlined in their contract.

Employees in Alberta are entitled to various legal protections, including minimum wage, overtime pay, vacation pay, job-protected leaves, and severance entitlements in the event of termination.

What Is an “Independent Contractor”?

An independent contractor is a self-employed individual or business that provides services under a contract but maintains control over how the work is completed. Unlike employees, independent contractors are not covered under Alberta’s Employment Standards Code and do not receive the same legal protections.

Key characteristics of an independent contractor include:

• Autonomy and Control: The contractor controls how, when, and where they complete the work rather than following an employer’s direct instructions.
• Ownership of Tools and Equipment: Contractors typically supply their own tools, equipment, and materials.
• Risk and Opportunity for Profit: Contractors assume financial risk, meaning they may experience profit or loss based on how they manage their business.
• Multiple Clients: Independent contractors often work with multiple clients rather than being tied to a single employer.
• No Entitlement to Employee Benefits: Contractors are responsible for their own tax remittances, employment insurance, and Canada Pension Plan (CPP) contributions.

Legal and Financial Implications of Worker Classification

Proper worker classification is crucial to ensuring compliance with employment laws and tax regulations. Misclassifying an employee as an independent contractor can lead to legal disputes and financial penalties for employers.

Employment Standards and Benefits

Employees are entitled to statutory benefits and protections such as minimum wage, vacation pay, and overtime pay. Independent contractors are responsible for managing their own benefits and protections. Employers who misclassify workers may be liable for unpaid wages, benefits, and statutory entitlements.

Taxation and Payroll Deductions

Employers must deduct and remit income tax, EI premiums, and CPP contributions for employees. However, independent contractors are responsible for their tax filings, including GST/HST remittances, if applicable. Misclassification can lead to penalties from the Canada Revenue Agency (CRA) for unpaid payroll taxes and other financial obligations.

Termination and Severance

Under the Employment Standards Code, Alberta employees are protected by termination notice or severance pay requirements. Unless specified in their contract, independent contractors are not entitled to the same protections. If a misclassified worker is terminated, an employer may face legal claims for wrongful dismissal and unpaid severance.

Liability and Workplace Injuries

Employees are typically covered under workers’ compensation through the Workers’ Compensation Board (WCB), which provides benefits in the event of a workplace injury. Independent contractors are generally responsible for obtaining their own insurance coverage. Employers who misclassify employees may be liable for workplace injury claims if the worker is not adequately covered.

How to Accurately Classify Workers

No single factor determines whether a worker is an independent contractor or an employee. Courts and regulatory bodies consider a variety of factors when assessing worker classification. The following questions can help determine the nature of the relationship:

• Who controls how the work is performed?
• Who provides the tools and equipment needed for the job?
• Does the worker have financial risk and opportunity for profit?
• Does the worker provide services to multiple clients?
• Is the worker integrated into the business, or do they operate independently?

A written employment agreement alone does not determine worker status. The actual working relationship and how the work is performed play a significant role in classification.

Best Practices for Employers and Workers

Employers and workers should follow certain best practices to minimize the risk of misclassification and legal disputes.

For Employers

Employers should clearly define roles and responsibilities within their employment or consultant/contractor contracts, ensuring they align with the true nature of the working relationship. Further, it is critical to maintain proper payroll and tax compliance methods based on worker classification. Employers should also regularly review their workers’ statuses, particularly as their job responsibilities evolve.

Consulting with an experienced employment lawyer also helps avoid unintentional misclassification and mitigate the risk of future disputes.

For Workers

Workers should ensure they understand the implications of working as independent contractors rather than employees, including the impacts on their rights and entitlements. Contracts should accurately reflect the working relationship, and workers should be encouraged to seek clarification as needed. Workers should also speak with an employment lawyer if they have concerns about being misclassified by their employer.

When working as an independent contractor, proper business records, including invoices and tax filings, are essential. Contractors must also obtain appropriate insurance coverage and register for WCB coverage as applicable.

DBB Law: Providing Calgary Workers and Employers With Comprehensive Employment Law Advice

The distinction between independent contractors and employees in Alberta is critical for both workers and employers. At DBB Law, our employment lawyers help businesses properly classify their workers to ensure compliance with employment laws, tax obligations, and contractual rights, reducing the risk of costly disputes. We also provide thorough advice and guidance for workers facing issues relating to misclassification.

Located in the heart of downtown Calgary, DBB Law offers innovative legal services across Alberta. We represent clients across a broad range of practice areas, including business law, civil litigation, construction law, family law, labour and employment, real estate, tax law, and wills and estates. To schedule a consultation, please reach out online or call 403-265-7777.