Canadian businesses sometimes characterize a working relationship as an “independent contractor” arrangement. However, courts and regulatory tribunals will generally look beyond the label to determine the true nature of the relationship. The consequences of getting it wrong can be significant for both parties, although can be greater for the employer or organization.

The Governing Test

The leading authority remains 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 SCR 983.  In that decision, the Supreme Court of Canada rejected the idea of a single definitive test and instead articulated a contextual, multi-factor analysis to determine whether a particular worker is, in the eyes of the law, a true independent contractor or not.

The main issue in that case was whether Sagaz was vicariously liable for a consultant’s wrongdoing.  

The Court held that there is no universally applicable conclusive test to determine whether a person is an employee or an independent contractor. Rather, the total relationship of the parties must be assessed. It then stated, at paras 47-48 that:  

The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account.  In making this determination, the level of control the employer has over the worker’s activities will always be a factor.  However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her tasks.

It bears repeating that the above factors constitute a non-exhaustive list, and there is no set formula as to their application.  The relative weight of each will depend on the particular facts and circumstances of the case.  [emphasis added]

When deciding whether an individual is, in the eyes of the law, an independent contractor, courts and tribunals generally consider a variety of factors, including:

(a) the degree of control exercised over the worker’s activities;
(b) whether the worker supplies their own tools and equipment;
(c) whether the worker hires helpers or subcontractors;
(d) the degree of financial risk assumed by the worker;
(e) the worker’s opportunity for profit; and
(f) the extent of the worker’s investment and managerial responsibility.

No single factor is determinative. The court assesses the total relationship and weighs each factor depending on the factual context.

Three Categories

Canadian common law recognizes a spectrum of different work relationships.

1. Employee
An employee works as part of the employer’s business, typically under the employer’s direction and control. Employees are entitled to statutory protections including minimum standards, overtime, vacation and common law reasonable notice of termination, unless a legally valid contractual termination clause supplants those common law rights.

2. Independent Contractor
An independent contractor operates a business and serves her or his clients. An independent contractor generally assumes financial risk, control over how work is performed, and retains the opportunity for profit. They are generally not entitled to employment protections.

3. Dependent Contractor
Between the above two categories lies an intermediate category: the dependent contractor. These workers may appear at first blush to be contractors, but are economically dependent on a single principal or client.

Similar to employees, dependent contractors are generally entitled to common law reasonable notice of termination, unless a legally valid contractual termination clause supplants those common law rights.

Courts generally consider dependency through factors such as exclusivity, length of relationship, the working arrangements, control, and the proportion of income derived from one source.

Legal and Financial Risks of Inaccurate Classification

Mischaracterizing a worker as an independent contractor when they are not can result in significant legal and financial consequences.

For employers, the risks of inaccurately characterizing a working relationship include:

(a) exposure to liability for unpaid wages, overtime, and vacation pay;
(b) liability for wrongful dismissal damages, including extended notice periods;
(c) potential tax and statutory remittance consequences; and
(d) reputational risk.

For workers, the risks of inaccurately characterizing a working relationship include:

(a) loss of statutory protections and benefits;
(b) uncertainty regarding termination rights; and
(c) potential tax exposure if incorrectly treated as self-employed.

The law is clear that substance prevails over form. Even where a written agreement characterizes a worker as an “independent contractor,” courts will disregard that label if the factual reality indicates otherwise.

Higher Risks to Employer

The legal and financial consequences of misclassification often fall more heavily on the employer. If a worker is later found to be an employee or dependent contractor, the employer faces retroactive liability for unpaid statutory entitlements including vacation pay, overtime and holiday pay, as well as potentially other withholdings and remittances plus interest and penalties. That exposure is compounded on termination. At that time, an individual wrongly characterized as a contractor may attract common law reasonable notice obligations. Those obligations can result in the employer being required to provide the individual with months or even years of compensation. Regulatory scrutiny from employment standards and tax authorities can result in further assessments and enforcement measures.  

Where an employer inaccurately uses contractor models across its workforce, the risk can rise very quickly and could even result in class action litigation.   

By contrast, the worker’s risk is often more limited. Although she or he may forgo protections or face some tax consequences, a finding of misclassification may result in an overall increase in the worker’s legal rights and entitlements.

Takeaway

The important consideration is not the label that the parties use, but whether the worker is truly an independent contractor, or something else, in the eyes of the law.

Determining whether a particular worker is an employee, a dependent contractor or independent contractor is often necessary to determining the individual’s fundamental rights and the organization’s obligations.  

For that reason, both businesses and workers should assess these relationships very carefully at the outset, seek advice early in the process, and characterize the relationship accurately. Doing so reduces the chances of a dispute, and unintended consequences, later.  

If you have concerns about your classification as an independent contractor, are experiencing issues at work, have been dismissed, or simply want to understand your rights, we are here to help. Learn more about Inspire Law or book a consultation to discuss your specific situation.

This article is for general informational purposes only, does not constitute legal advice, and is not directed at any particular client or case. The views expressed herein are based on current law, specific facts and available information and may not be applicable to your specific situation or to any matter on which we may act. You should not rely on this material in place of consulting a qualified lawyer about your own situation.

About the Author
Susan Kootnekoff is a lawyer and founder of Inspire Law, an employment and human rights law practice that serves clients across British Columbia and beyond. She represents clients in employment related matters including wrongful dismissal claims, employment contract negotiations, severance negotiations, human rights complaints and workplace rights.

© 2026 Susan Kootnekoff, Barrister & Solicitor