Misclassification of Employees as Contractors in Ontario

Calling someone an independent contractor doesn’t make them one. 

Many Ontario businesses learned this the hard way when the Canada Revenue Agency reassessed their “contractors” as employees, hitting them with years of unpaid payroll taxes, penalties, and interest. Or when a long-term contractor sued for wrongful dismissal and won damages equal to a year’s salary. Getting worker classification wrong is expensive.

Here’s the stark reality: employees cost more than contractors. 

As an employee, workers get minimum wage, overtime, vacation pay, statutory holidays, and notice when you terminate them. You withhold their taxes, contribute to CPP and EI, and potentially provide benefits. 

When you fire them without cause, they can sue for months of pay.

Contractors? None of that applies. 

They invoice you, pay their own taxes, buy their own equipment, and can usually be terminated according to whatever the contract says. 

This difference can mean tens of thousands of dollars per worker annually. That’s why businesses push workers into contractor status. It’s also why the government scrutinizes these relationships carefully.

The CRA and courts don’t care what your contract says. They look at reality. Three main tests determine whether someone is truly a contractor.

Control: Who’s really in charge? 

If you tell someone when to work, how to do their job, and supervise their daily activities like a boss, they’re probably an employee. Real contractors control their own methods. You tell them what result you want; they decide how to achieve it.

Integration: Are they running a business or just working for you?

Employees are woven into your company fabric. 

They work for you exclusively, use your equipment, work from your office, and their role is central to your operations. 

Contractors serve multiple clients, use their own tools, work from their own space, and provide specialized services you don’t otherwise offer in-house.

Economic reality: Who takes the financial risk? 

Employees get paid the same whether your business thrives or tanks. 

Contractors can make extra profit if they work efficiently, but they also eat losses if projects go sideways. They invest in their own equipment, pay their own expenses, and live or die by their business decisions.

Courts weigh all these factors together. You can’t win on contracts alone if the day-to-day reality screams “employee.”

CRA comes calling. 

They reassess your “contractor” as an employee going back several years. Suddenly you owe all the income tax you should have withheld, both employee and employer CPP contributions, EI premiums, plus interest and penalties. For a contractor earning $80,000 annually over three years, you could face a six-figure tax bill overnight.

Ministry of Labour steps in. 

They order you to pay all the vacation pay, overtime, stat holiday pay, and other Employment Standards Act entitlements the worker should have received. Add administrative penalties on top. Two years of unpaid entitlements add up fast.

Wrongful dismissal lawsuits. 

Your “contractor” sues when you end the relationship, claiming they were actually an employee entitled to reasonable notice. Courts award notice periods based on age, service length, and position — sometimes exceeding 24 months. That $80,000 contractor? You might owe them $80,000 to $120,000 in wrongful dismissal damages.

These aren’t theoretical risks. Businesses face these consequences regularly.

Long-term exclusive relationships. 

Your “contractor” has worked only for you for three years. They come to your office every day, use your computer, follow your schedule. No matter what the contract says, that’s employment.

Core business functions. 

You run a software company and hire “contractor” programmers who write your main product. They’re not contractors—they’re doing your core business work.

Employees renamed contractors. 

You can’t convert employees to contractors without fundamentally changing the relationship. If they still do the same work, at your office, under your direction, just with a new contract label, nothing changed legally.

Micromanagement. 

When you control when contractors work, how they do tasks, what they wear, and require them to attend all your meetings and follow employee policies, you’ve created employment.

Real contractors run actual businesses. 

They have multiple clients, not just you. They market their services, carry business insurance, and register their business name. They invoice you like any other vendor.

They use their own resources. 

Their laptop, their software, their workspace. If they’re using all your equipment at your office, that’s an employee.

Project-based, not permanent. 

“Build this website” or “audit our 2024 financials” are contractor projects. “Handle our IT indefinitely” starts looking like employment, especially if it stretches past a year.

They control the how, you control the what. 

You want a financial audit completed by March 31. They decide when they work on it, what methods they use, and whether to delegate parts to their junior associates. That’s contracting.

They can profit from efficiency. 

Fixed-price projects where contractors can earn more by working smart, or lose money if projects drag on, create genuine business risk typical of independent contractors.

They can work for your competitors.

If your contract prevents them from serving other clients in your industry, you’re treating them like employees with non-competes.

Worried about worker classification or facing misclassification claims? Our employment lawyers help employers structure compliant contractor relationships and defend against wrongful dismissal claims. Contact us at 416.901.9984 or info@pintoshekib.ca for straight advice about your specific situation.