Canada is home to a growing gig economy, with a quarter of Canadian adults holding jobs in the gig economy. There is also an increase in new types of work arrangements, ranging from hybrid and remote work options to independent and consulting contracts.
As a result, it's becoming increasingly important for companies to understand the difference between an independent contractor and an employee in Canada, lest they face fines and penalties for misclassification.
One Canadian province stands out for its excellent talent pool, particularly for tech companies on the United States West Coast. That province is British Columbia (BC). Located in the same time zone as Silicon Valley, it’s long been a go-to for US companies hiring Canadian employees abroad.
Whether you want to compliantly engage independent contractors in Canada or hire Canadian employees, it's important to be aware of the significant distinctions between the two work arrangements.
So, what is misclassification risk in Canada, and how can this be avoided? Read on to gain insights into how British Columbia defines and classifies the two types of workers - you may be surprised!
Federal vs. Provincial Law (in BC)
When it comes to hiring employees in Canada, it's important first to clarify how Canada governs employment status. Canada is made up of both federal and provincial governments, with equal status in the Constitution. As a result, Canadian employment laws vary in how they are governed across Canada and in each of its provinces and territories.
This means that the rules in one province can differ significantly from those in a different province! While the employment law does vary, certain federal labor laws and protections apply to every Canadian citizen and resident.
Regardless of one’s location in the country, employment in federally regulated industries (like airlines and banking) is governed by the Canada Revenue Agency (CRA). The CRA has the ability to determine who is an employee and who is an independent contractor within these industries.
Provincial laws, governing bodies, and courts regulate all other industries (and, in fact, most companies). These companies are not subject to the federal rules as regulated by the CRA above. Where employment contracts are formed determines the authoritative province or territory unless otherwise stated.
Who and What Regulates Employment in BC?
British Columbia’s Employment Standards Act (ESA) sets the minimum employment regulations throughout the province. The Employment Standards Branch is responsible for ensuring that the ESA is upheld and enforced.
Workers may also be entitled to other protections depending on the details of their employment contract or collective agreement. The following provincial laws provide rights to workers in British Columbia in addition to the Employment Standards Act:
How Does BC Define an Employee?
The BC ESA defines employees as individuals working in exchange for wages, doing work for an employer that their employees typically perform. The ESA includes deceased individuals in this definition.
The ESA also relies on the definitions of ‘employer’ and ‘work’ to substantiate its definition of ‘employee.’ According to the ESA, an employer includes those who previously or currently have direction and control over an employee while bearing the responsibility of employing them. ‘Work’ refers to the labor or service an employee performs for an employer.
What Rights Are Employees in BC Entitled To?
The Employment Standards Act sets the following minimum rights and obligations employees are entitled to in BC. Some industries and employees are subject to special conditions, such as tech, agriculture, and taxis. With the exception of federally regulated industries, most employees in BC are entitled to the following.
Minimum Wage
As of June 1, 20243, the minimum wage in BC is CA $16.75 per hour. You cannot pay employees below this rate when you hire and pay employees in BC. Canada regularly updates its minimum wage standards, so make sure to keep abreast of such changes in the Canadian market.
Employees doing piece work (a rate of pay that is based upon a measurable quantity of work completed) are still entitled to this minimum wage. Farm workers, for instance, can be paid a piece rate for their work. These workers may be compensated by their individual output, such as how much fruit is picked per day, which is entirely dependent on crop yield.
Hours of work
Employees in Canada can work up to eight hours per day and 40 hours per week. These durations include paid breaks.
Overtime
Employers are required to pay employees 1.5x their regular hourly wage, commonly referred to as “time and a half,” for every hour worked over eight hours a day or 40 hours a week.
Local labor laws also dedicate a minimum daily work-hour requirement, mandating that employees be scheduled for a minimum of two hours of work. If employees show up for their scheduled shifts and find no work for them to do, they must still receive compensation.
If the employee is scheduled to work for more than eight hours, such as a 10-hour shift, they must be paid for at least four hours.
Holidays
Most employees in BC can take the following public holidays off with pay:
- New Year’s Day
- Family Day
- Good Friday
- Victoria Day
- Canada Day
- B.C. Day
- Labour Day
- Thanksgiving
- Remembrance Day
- Christmas Day
If an employee is required to work on a public holiday, they must be paid time and a half for the first eight hours worked and double for any overtime.
Travel time and breaks
Rest time is crucial for ensuring that employees are both content and productive. BC law dictates that an employee must have at least 32 hours in a row free from work each week. If an employee works during this period, such as in the event of an emergency, they must be paid extra.
Additionally, an employee must have at least eight hours off between shifts. Employees are paid for travel time only when it's directly related to their job. For instance, if an employee is asked to attend a conference in another city, they are paid for the time spent driving or flying to and from this location.
Vacation Time and Pay
Employees who have worked with their employer for:
- One year is entitled to two weeks of paid vacation. Vacation pay is 4% of one’s annual wages.
- Five years or more are entitled to three weeks of paid vacation. Vacation pay is 6% of one’s annual wages earned the previous year.
If an employee leaves their job before taking a vacation, their employer is required to compensate. Employees are not allowed to skip taking their vacation time and opt to receive vacation pay instead.
Leaves of Absence
Most employees in BC are entitled to take the following job-protected leaves of absence. Note that some of these are paid while others are not.
- Maternity and parental leave
- Compassionate care leave
- Bereavement leave
- Sickness Benefits
- Family responsibility leave
- Critical illness and injury leave
- Domestic or sexual violence leave
Do BC Employees Have Access to Any Other Rights or Benefits?
It’s becoming more and more important for employers to do their part to foster employee well-being. As a result, many employers in BC offer their employees more robust benefits than the minimum employment standards outlined in the ESA.
The employer must abide by the terms of an employment contract if it stipulates that an employee is entitled to more rights or benefits than the ESA's basic requirements. The higher rights or benefits take precedence over the minimum ones.
Employees can apply for Employment Insurance (EI) and the Canadian Pension Plan (CPP) if needed.
How Does BC Define an Independent Contractor?
With the boom of remote work and more individuals looking for “side hustles,” there are considerations for companies to take into account when engaging independent contractors in Canada. There is a distinction to be made between employees and contractors — the ESA states that independent contractors are self-employed individuals in business for themselves.
Whether or not your worker is considered an independent contractor depends on several tests the government may apply. The government may assess the following to determine the worker’s actual status:
- the level of control the payer has over the worker's activities
- whether the worker or payer provides the tools and equipment
- whether the worker can subcontract the work or hire assistants
- the degree of financial risk the worker takes
- the degree of responsibility for investment and management the worker holds
- the worker's opportunity for profit
- any other relevant factors, such as written contracts
Consider these aspects when you hire employees in Canada or build a relationship with a self-employed individual.
What Rights and Benefits Are Independent Contractors Entitled to in BC?
Independent Contractors are not eligible to receive protection from the ESA and, therefore, do not qualify for any of the rights and benefits listed above. They also have few legal protections. However, they do have the option to elect to receive specific self-employment EI benefits.
How Do Taxes Differ Between Independent Contractors and Employees?
Employers are required to make the following deductions from employees' insurable earnings:
- Canada Pension Plan (CPP) Contributions
- Employment Insurance (EI) Premiums
- Federal Income Tax
- British Columbia Provincial Income Tax
Consequently, employees' take-home pay (or net pay) is less than their gross income. After filing their taxes, employees are eligible to receive their share of federal and provincial benefits and credits as well as a tax refund.
On the other hand, independent contractors are responsible for paying federal and provincial taxes on their gross income by themselves (ie, these are not deducted at the source). They manage their own tax forms, though their clients in Canada do need to issue an income slip at the end of the year.
If you don’t properly classify your employees, you’re likely going to suffer incorrect payroll contributions. So, on top of fees relating to misclassification, you’ll have to recalculate your payroll taxes as well for the total number of employees who have been incorrectly classified.
What About US Companies Hiring Employees in Canada?
While many US companies today are looking to Canadian talent to add to their global workforce, there are certain things that they need to be aware of. For a US company hiring a Canadian citizen to work in Canada, the company can choose to:
- Incorporate and set up foreign entities in Canada
- Engage Canadian workers as independent contractors
- Partner with an Employer of Record (EOR) provider
Employment laws also vary by province, so it is important to check each region's specific rules and regulations. For example, in BC, you’ll need to pay corporate tax if you set up a foreign entity.
How Does BC Determine Who Is an Independent Contractor and Who Is an Employee?
Employers and employees can file a complaint with the Employment Standards Branch if clarification is required regarding worker classification. If an issue isn’t resolved through mediation, an Employment Standards Branch officer will investigate and make a formal decision.
The Employment Standards Branch and courts in BC use the following common law tests to determine if a worker is an independent contractor:
- Is the worker under the direction and control of an employer?
- Does the worker operate their own business?
- Does the work have the opportunity to gain profits or incur debt?
- Is the work essential to the business?
- Is there an ongoing relationship?
- How long has the worker worked for the employer?
- Who has control over the materials and tools used?
A more deeply integrated worker within a company is likely to be an employee who performs a crucial function in the business.
Example: Sandra works as a sales representative for a large sporting goods company. Sandra is an employee as she works in a capacity that represents the employer’s business.
Risk of Misclassification
Whether employers are looking into hiring employees or independent contractors, it is important to stay well-informed about the intricacies of each type of worker because mistakes can happen.
If an employer is found guilty of misclassification — meaning that the employer does not consider or treat an individual who is an employee as such — they run the risk of financial penalties ranging from CA $500 to CA $10,000, in addition to other more severe punishments, as determined in the investigation.
It can negatively impact workers as well. Misclassification can leave them without access to employer-provided benefits and limit their ability to apply for government programs. This is why it is critical for companies to evaluate their relationships and agreements with employees, ensuring that all are appropriately classified.
Worried About Misclassification in Canada?
Speak with a Canada expert at Borderless to make sure that your company is on the right side of the law.
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