Independent Contractors vs Employees - Important Factors to Note
Written by Kyle Murdy, JD Candidate 2025 | UCalgary Law
The decision between bringing someone into a business as an employee or an independent contractor has both benefits and consequences in terms of their exit from the business. First, the factors that differentiate an employee from an independent contractor must be considered. To do this, the factors from the Sagaz test will be considered (1). These are listed below:
Control: The more control the employer has, the more likely this is going to be seen as an employer-employee relationship. Does the worker decide when to work? Can the worker take breaks when he or she wants to? If yes, the worker is more likely an independent contractor. Does the employer provide training, quality assurance, and performance evaluations? If yes, the worker is more likely an employee. Are there standards and expectations set up but no day-to-day control? Less day-to-day control results in the worker to more likely be seen as an independent contractor.
Equipment: Does the worker provide his or her own equipment? Does the worker have the ability to hire other people to help them? If yes the worker is more likely an independent contractor.
Financial Risk: What is the degree of financial risk the worker carries? Does the worker have the ability to make more money or less money? Do their actions change their economic outcome? If yes, the worker is more likely an independent contractor. If there is no meaningful opportunity to profit then the worker is more likely an employee. If the worker has an ability to determine their profit or loss margin, they are more likely an independent contractor.
Responsibility: What is the degree of responsibility for investment and management held by the worker? Is the worker in charge of their own work schedule by accepting or rejecting jobs? If yes, the worker is more likely an independent contractor.
One difference between the two to consider for businesses adding personnel is what occurs when an employee is to be terminated. When an employee is terminated by a business, the company will be found liable for unpaid taxes, EI, and CPP contributions. In certain cases, severance payments will also be required. Independent contractors are very different, as their termination provisions are typically governed by the terms of their independent contractor agreement. They will not typically receive the benefits described above that employees receive unless these are explicitly provided for in the terms of their contractor agreement. Companies instead may terminate these independent contractors when a material breach of their agreement occurs - and this breach must be substantial enough to defeat the purpose of the contract.
Endnotes
1. 671122 Ontario Ltd v Sagaz Industries Canada Inc, 2001 SCC 59, [2001] 2 SCR 983.
