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While they may be tasked with similar work, legally there is a difference between independent contractors vs employees. Additionally, you’ll likely think about and utilize them differently within your organization as well.

This article will help you understand the key differences between hiring an independent contractor vs employee and the pros and cons of each.

What Is An Independent Contractor?

Typically, contractors are experienced workers hired by organizations on a short-term basis to work on specific projects. As such, they’re treated differently within organizations.

From a legal perspective, independent contractors are classified as employers. This means that they’re responsible for paying the appropriate payroll taxes and ensuring they have appropriate medical and workers’ compensation coverage.

Difference Between An Independent Contractor vs Employee

Independent contractors and employees are fundamentally different types of workers in the eyes of Canadian and US labor laws, income tax laws, and workers' compensation regulations. 

Tax agencies in both Canada and the US—the Canada Revenue Agency (CRA) and the Internal Revenue Service (IRS), respectively—refer to independent contractors as “self-employed” individuals.

Both Canada and the United States make clear distinctions in the working status between a self-employed contractor and an employee, particularly as they relate to the following:

Employment insurance (EI) benefitsState unemployment insurance (UI) benefits 
Canada Pension Plan (CPP) benefitsUS Social Security benefits
Workers’ compensation coverage Workers’ compensation coverage 
Personal income tax and self-employment tax regulations for CanadaPersonal income tax and self-employment tax regulations for the United States
Costs and protections for permanent employees.

Companies that choose to hire an employee are responsible for all of the items listed above.

For example, they need to ensure the correct tax withholdings and deductions (e.g. EI, CPP, FICA, Medicare tax) are made when the employee gets paid.

A company will not do this for a self-employed worker. It’s the contractor’s responsibility to pay the appropriate taxes and ensure they have appropriate medical and workers’ compensation coverage.

Similarly, employment and labor laws, such as Canada Federal Labour Standards and the US Fair Labor Standards Act, apply to employees but not independent contractors. These laws govern everything from hiring and termination practices to working hours and vacations. 

Contractor vs Employee Pros And Cons

The following table summarizes the pros and cons of an independent contractor vs. employee, with an ‘X’ indicating an advantage of one over the other.

Long-term commitmentYesNo
Ease of terminationNoYes
Quickly change responsibilitiesYesNo
Pay rates/compensationYesNo
Overhead costs (benefits, insurance, equipment etc)NoYes
Management time requiredNoYes
Training requirementsYesNo
Level of control over workYesNo
Pros and cons of independent contractors vs employees.

Benefits Of Contractors vs Employees (And Vice Versa)

Hopefully, by now you have a rough idea of the pros and cons of a contractor vs. employee, and why you might hire one over the other.

There are always exceptions to the rule, but below are some of the typical advantages and disadvantages of each.

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Employees are more committed

Due to their status, permanent employees might be more vested in the long-term success of your organization.

Independent contractors will also often work with more than one client at a time and set their own priorities on which clients to focus on. 

On the other hand, contractors also bear financial risk, which may motivate them to deliver high-quality results.

Contractors are focused

The work you need doing may only require a short time commitment and have a defined beginning and end.

If so, it doesn’t make sense to take on the financial and time burdens of hiring and then firing an employee unless you anticipate having multiple similar projects with work that will go on indefinitely. 

Contractor relationships may be easier to terminate

It may be easier to fire a contractor vs terminating someone’s employment if things aren’t working out. However, this relies on having specific clauses written into the agreement that simplify termination.

Employee’s responsibilities are more adaptable

It is easier to quickly change the scope of an employee’s role, goals, and/or objectives than it is with a contractor. This gives the business owner flexibility to rapidly adapt to changing project priorities or unforeseen events such as managing a crisis.

Salary vs total compensation

Because of the temporary nature of their work, the higher degree of specialization, and the experience that they bring, contractors are typically paid much higher hourly rates than employees doing similar work.

On the other hand, by hiring a contractor you avoid paying for employee-related costs such as health insurance, employee benefits, and office supplies and equipment. 

The hourly rates and the length of time the person is working will impact the total overall cost. In many cases, the overall cost of an employee can be significantly higher than a contractor.

Contractors (can) save time

A contractor can save you time that you would ordinarily spend on getting an employee onto the payroll, setting up their workspace, etc. Also, because you don’t have behavioral control over how they are doing work, there is less time required to manage them.

On the other hand, when you invest time into getting an independent contractor up to speed on a project, that time investment is lost if you end up having to hire subsequent contractors to complete or correct previous work.

Additionally, contractor payroll can become a separate function from your regular payroll, adding a layer of complexity to admin work.

Contractors often require less training

An independent contractor requires less training since they rely on their own experience and expertise to do the work and have control over how work will be done.

Employees can be easier to control

You may simply want to have a higher degree of control over how work gets done, in which case it makes more sense to hire an employee vs. a contractor.

How To Tell The Difference Between A Contractor vs Employee

The misclassification of employees can cost organizations in fees and fines and, in some cases, legal action might be taken.

Organizations like the CRA in Canada, and the IRS, and U.S. Department of Labor in the United States, set out a number of “tests” or “checks” around worker classification, to help determine whether someone is a contractor or employee.

Some of these tests include:

1. Level of control or independence

The difference between a contractor and an employee is ultimately about control.

“An employer has the right to control how the employer does the work, whereas a contractor independently controls how they will work and deliver the results the organization is looking for,” says Jason Golbey, lawyer and founder of Golbey Law.

Control can include behavioral control (level of instruction, training, and guidance given by you to the worker) and financial control (significant investment by you in their work, providing laptops and equipment, business expense reimbursement, etc.).

2. Economic and financial risk

If the worker faces financial risk by taking on work, bears all responsibility for profit or loss, and accounts for all costs incurred in the pursuit of that profit, then they are probably an independent contractor.

3. Nature of the employment relationship

How do you and the worker interact with each other? Is there a clear written agreement in place that defines the relationship? “It’s critical to put in place a written contract or employment agreement outlining the relationship, and then actually do what the contract says,” says Golbey.

How Can Professionals Like Lawyers And Accountants Help?

In a recent article on hiring your first employee, I suggested that founders and small business owners make sure they have access to a good lawyer and accountant. 

Unless you enjoy reading labour codes and employment regulations in your spare time (I mean, who doesn’t?), I strongly suggest finding professionals who can help you in dealing with more complex issues. 

They can assist you in interpreting employment laws and CRA and IRS tax regulations; help you understand their implications and how they apply to you; and provide insight into common law practices that might affect you.

Utilizing Independent Contractors AND Employees

Many organizations will hire a mix of both independent contractors and employees at some point along their journey.

Tools such as contractor management software help with hiring, overseeing, and paying contractors and ensuring compliance with regulations. They simplify coordination, improve efficiency, and help manage contractor-related tasks and projects effectively.

A professional employer organization or employer of record can help if you prefer the idea of permanent staff and want to stay on the right side of employment law while reducing some common human resources headaches.

Take a look at our shortlist of the best professional employer organizations and employer of record services.

And if you're just trying to keep up with all the latest developments and gain insights on overcoming staffing challenges, you might want to consider attending one of the many staffing conferences focused on these very challenges throughout the year.

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By Mike Gibbons

Mike has extensive experience in sales, marketing, and product strategy; organizational and team development; and business growth and operations. He's held various senior leadership positions in the technology industry, and in 2016 participated as a lead member of the deal team responsible for the sale of Point Grey Research to FLIR Systems for USD$256M. Mike is guided by his deeply-held beliefs in connection, curiosity, humour, empathy, and honesty. Since leaving the corporate world in 2018, he's provide fractional executive and growth and strategic planning advisory services that have helped several early stage companies mature, grow responsibly, and live true to their values.