- Status is determined by the substance of the relationship, not by what the agreement calls it.
- Ontario recognises a middle category, the dependent contractor, entitled to reasonable notice.
- Misclassification is expressly prohibited and exposes an employer to retroactive liability.
- Consequences run beyond employment law into tax, CPP, EI and vicarious liability.
Why the label does not settle it
Parties can call their arrangement whatever they like. Courts, tribunals and the Canada Revenue Agency look at what the relationship actually is.
This is deliberate. If the label controlled, statutory protections could be removed by drafting, which would defeat their purpose.
The contract is evidence of the parties’ intention and does carry some weight, but it does not decide the question where the reality points the other way.
What the analysis looks at
The considerations that recur across the case law are:
- Control. Who decides what work is done, how, when and where. A high degree of control points to employment.
- Tools and equipment. Who provides and maintains them.
- Chance of profit and risk of loss. Can the worker increase profit through their own management, and can they lose money? Genuine entrepreneurial risk points to contractor status.
- Integration. How central the worker is to the business, and whether they are held out as part of it.
- Exclusivity. Whether the worker serves other clients, or works for this one alone.
- Substitution. Whether the worker can send someone else to do the job.
No factor is decisive. The exercise is to characterise the whole relationship, and the central question is often whether the worker is genuinely in business on their own account.
The middle category
Ontario law recognises a third status between employee and independent contractor: the dependent contractor.
A dependent contractor is genuinely a contractor but works exclusively or near-exclusively for one client, creating economic dependence resembling employment.
The significance is that dependent contractors are entitled to reasonable notice of termination at common law. A long-serving contractor who worked for a single client can therefore have a substantial claim on termination, which frequently surprises businesses that assumed a contract meant they could simply stop.
Exclusivity, and its degree, tends to be the pivotal question.
What misclassification costs
Treating an employee as a contractor is prohibited under the Employment Standards Act, and the exposure is retroactive.
A business found to have misclassified may face claims for unpaid overtime, vacation pay, public holiday pay and termination entitlements for the whole period; assessments from the Canada Revenue Agency for unremitted source deductions, CPP and EI, with interest and penalties; and potentially vicarious liability for the worker’s conduct.
The worker’s own tax position can also be reopened, since deductions claimed as a business may not have been available.
Getting it right
For a business, the practical test is whether the arrangement would look like a contractor relationship to someone who ignored the contract and watched how it operated for a month.
Where a genuine contractor relationship is intended, it should look like one: the worker sets their own hours and methods within the scope of the engagement, uses their own equipment, is free to work for others, invoices for defined deliverables, and bears real risk.
Where the reality is that the person works set hours, under direction, with the business’s equipment, exclusively, indefinitely, the document will not save the classification.
Common questions
Does incorporating make someone a contractor?
Not by itself. A personal services arrangement through a corporation can still be characterised as employment, and the CRA has specific rules directed at exactly this.
Can a contractor claim wrongful dismissal?
A true independent contractor generally cannot. A dependent contractor generally can, and a misclassified employee certainly can.
Who decides status?
It depends on the context, a court in a wrongful dismissal claim, the Ministry of Labour on an ESA complaint, the CRA for tax. They apply similar factors but can reach different conclusions for different purposes.
We have worked this way for years. Does that settle it?
No. Duration does not convert an employment relationship into a contractor one; if anything, long exclusive engagement supports dependent contractor status.
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