Simon Says: Subcontractors vs. Employees
Subcontractor vs. Employee: What the CRA Wants You to Know
When it comes to payroll, taxes, and business compliance, correctly classifying your workers as either employees or subcontractors is essential. Getting it wrong can lead to serious financial consequences—including back taxes, penalties, and interest. But how do you know the difference? And how does the Canada Revenue Agency (CRA) view it?
Understanding the Difference
At its core, the distinction lies in the level of control and independence:
· Employees typically work under the direction and control of the employer. The employer decides what work is done, how it is done, and often provides tools, equipment, and training. Employees are also entitled to benefits such as vacation pay, CPP and EI contributions, and workplace protections under employment standards.
· Subcontractors (or independent contractors), on the other hand, run their own businesses. They may work for multiple clients, provide their own tools, set their own hours, and assume the risk of profit or loss. They are responsible for their own taxes, including GST/HST and income tax filings.
The CRA’s Four Tests
The CRA applies several key tests to determine a worker’s status:
1. Control – Who directs the work and how it’s completed?
2. Ownership of Tools – Does the worker provide their own tools and equipment?
3. Chance of Profit/Risk of Loss – Can the worker make a profit or suffer a loss?
4. Integration – Is the worker integrated into the employer’s business, or do they operate independently?
No single factor is decisive; it’s about the full relationship.
The Uber Case: What It Shows Us
A high-profile example that highlights this issue is the Uber v. Heller case. While the 2020 Supreme Court of Canada decision primarily dealt with the enforceability of arbitration clauses in Uber’s contracts, it set the stage for broader challenges related to the employment status of gig workers.
Following that case, class-action lawsuits were brought forward by Uber drivers claiming they were misclassified as independent contractors and seeking employment benefits
such as minimum wage, vacation pay, and overtime. The argument was that Uber exerted substantial control over drivers—setting fare prices, assigning trips through algorithms, and limiting driver-client relationships—which more closely resembled an employer-employee relationship.
However, in a key 2023 decision by the Ontario Superior Court, Uber successfully argued that drivers are, in fact, independent contractors. The court acknowledged that while Uber maintains a degree of control via its app and policies, drivers still had the flexibility to choose their working hours, reject rides, work for competing platforms, and absorb their own business risks (e.g., car maintenance, fuel costs). This operational freedom aligned more closely with the characteristics of subcontractors.
This ruling confirmed that, at least under Ontario law and in this instance, Uber drivers are not employees. It was a major victory for gig economy platforms, though it also raised ongoing debates about whether current laws sufficiently protect gig workers.
Why It Matters for Your Business
Misclassification can be costly. If the CRA determines that someone you’ve hired as a subcontractor is really an employee, you could be liable for unpaid CPP contributions, EI premiums, income tax withholdings, and penalties.
Best practices:
· Use written contracts that clearly define the relationship.
· Be honest about the level of control and independence.
· Reassess regularly—especially as roles evolve.
Final Thoughts
As the gig economy grows, the line between contractor and employee continues to blur. The Uber case is just one of many that demonstrate how complex and high-stakes these distinctions can be. When in doubt, consult a tax professional or legal advisor to ensure your business is compliant and protected.
