“I’ll Just Work as a Contractor” – What That Means for Your Startup

Written by Calder Newson
JD Candidate 2026

I.Introduction
The blog is provided for informational purposes only and does not constitute legal advice.

A question startups may face is whether to engage a potential worker as an employee or an independent contractor. Maybe someone eager to help with your startup asks, “Can you just pay me as an independent contractor?” At first glance, that might seem like no problem. However, the distinction between an employee and an independent contractor is more than just a label.
This blog explains why someone may choose to be an independent contractor, how the courts determine the true nature of the employment relationship, and the potential consequences of misclassification.

Let’s start with why someone might ask to be an independent contractor.

II.Why might someone ask to be an independent contractor?
Status as an independent contractor can offer several advantages to the worker.

The significant advantage is that independent contractors can deduct certain expenses incurred for the purpose of earning an income from their taxable income.[i] That means an independent contractor could reduce their taxable income by deducting expenses for things like equipment, supplies, and travel related to earning their income.[ii]

Second, an independent contractor has more control over when, where, and how they work. Essentially, an independent contractor is not tied to a single employer, allowing them the freedom to take on multiple opportunities.

III.Why might my startup want to hire an independent contractor?
A startup may also find an independent contractor relationship appealing.

First, by hiring someone as an independent contractor, the startup does not need to withhold or remit the independent contractor’s income tax, Canada Pension Plan (“CPP”) contributions, or Employment Insurance (“EI”) contributions.[iii]

Second, independent contractors are not captured by Alberta’s Employment Standards Code, RSA 2000, c E-9 (“ESC”). That means the startup is not required to provide independent contractors with benefits like vacation and termination pay. When a worker is classified as an employee, the employer must comply with the ESC and cannot contract out of the entitlements the ESC grants.[iv]

IV.Can I simply make all my hires independent contractors?
Simply calling someone an independent contractor does not make it so. Even if both parties agree to the label, courts look at the substance of the relationship, not just the label.

There is no conclusive test which can be universally applied to determine whether a worker is an employee or an independent contractor. The total relationship of the parties is evaluated to make the determination. However, the analysis generally focuses on the control test. Courts may rely on several factors to make their determination, such as:

1. The level of control the employer has over the worker’s activities;
   1. Is the worker required to come to work every day?
   2. Does the worker determine their own hours?
   3. Does the worker work at the employer’s office, or does the worker work from their own location?
2. Whether the worker provides their own equipment;
3. The worker’s ability to negotiate their agreement;
4. The worker’s economic dependence on the employer;
5. The worker’s opportunity for profit and whether they have a risk of loss;
6. Whether the worker is entitled to access the employer’s benefit programs;
7. Does the contract restrict the worker’s ability to work for other clients?

Each situation is assessed on its facts, meaning the courts will consider all these factors and determine whether an individual is an employee or an independent contractor.[v]

V.What happens if a “contractor” is actually an employee?
If your startup treats someone as an independent contractor but the relationship is later deemed to be an employment relationship, there can be consequences. For example, your startup could be required to remit any unpaid income tax, CPP contributions, and EI premiums, along with any applicable interest and penalties.[vi] Additionally, your startup may be liable for a wrongful dismissal lawsuit, and the worker may be entitled to, among other things, termination pay and unpaid wages.

VI.Intermediate category of “dependent contractor”
An intermediate category exists for “dependent contractors.” This category applies to self-employed workers who are economically dependent on a single organization for most or all of their income.[vii] The dependent contractor category provides limited employment-like protections, including a right to reasonable notice of termination or termination pay, for contractors who are economically dependent on a single organization.

VII.What if the worker incorporates a company to provide their services?
Sometimes, a worker may incorporate a company and ask you to hire the company rather than hire them personally.

If the worker were simply an employee, but for the worker’s incorporation, the CRA may deem the worker's incorporated company a “Personal Services Business” (“PSB”).[viii] If deemed a PSB, the worker is not entitled to the same tax deductions to reduce their taxable income as a true independent contractor, and the PSB is required to pay a higher business tax. At the time of writing, PSBs in Alberta are taxed at a rate of 41%.[ix]

VIII.Conclusion
Knowing the difference between an employee, an independent contractor, and a dependent contractor is more than just a formality or a label on a contract. A genuine independent contractor relationship can benefit both the worker and a startup by offering cost savings for the startup, potential tax savings for the worker, and flexibility for both parties.
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However, misclassifying the relationship can have serious consequences. What ultimately matters is the substance of the working relationship, not just the label you give it. Courts will look at the total relationship between the parties to decide how it should be classified.
Even if a worker incorporates their own company, the CRA could deem the corporation a PSB, which carries a higher tax rate and fewer tax deductions. 


[i] Income Tax Act, RSC 1985, c 1 (5th Supp), s.18(1)(a).

[ii] Income Tax Act, RSC 1985, c 1 (5th Supp), s.18(1).

[iii] Income Tax Act, RSC 1985, c 1 (5th Supp), ss.153(1); Canada Pension Plan, RSC 1985, c 8, ss.8(1), 21(1), 21(2), and 22(1); Employment Insurance Act, SC 1996, c 23, ss.82(1) and 83(1).

[iv] Employment Standards Code, RSA 2000, c E-9, s.4.

[v] 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2021 SCC 59.

[vi] Income Tax Act, RSC 1985, c 1 (5th Supp), s.227; Canada Pension Plan, RSC 1985, c 8, ss.21(2), and 22(1); Employment Insurance Act, SC 1996, c 23, s.82(9) and 83(1).

[vii] McKee v. Reid’s Heritage Homes Ltd., 2009 ONCA 916, at para 30.

[viii] Income Tax Act, RSC 1985, c 1 (5th Supp), s.125(7).

[ix] Income Tax Act, RSC 1985, c 1 (5th Supp), ss.18(1)(p), 123.5, 125(7), and Part I, Division D; Alberta Corporate Tax Act, RSA 2000, s. A-15 s.21.