Employment contract vs contractor agreement: what each document actually does

“We had them sign a contractor agreement, so they’re a contractor.” That costly assumption is wrong. Paperwork matters, but not how most owners think. Here is what each document should establish, and what the CRA actually tests.

Working out an average day’s pay for a B.C. statutory holiday? The BC stat pay calculator does it, and settles the qualifying test first.

Related: B.C. statutory holiday pay rules.

Two documents, two purposes

An employment contract governs a contract of service: position and duties, pay and how it is paid, hours and overtime, vacation, benefits, confidentiality, and notice on termination. Statute sets its floor: nothing can undercut B.C.'s Employment Standards Act minimums, and a clause that tries is unenforceable.

Related: Final pay after termination in B.C..

An independent contractor agreement governs a contract for services: deliverable not hours, fee and payment terms, tools and equipment, insurance and liability, subcontracting, intellectual property and GST/HST. It should state plainly that the contractor handles their own taxes, CPP and, where applicable, workers’ compensation.

The two documents should not read like each other. If your “contractor agreement” sets working hours, requires attendance at staff meetings, provides the equipment and prohibits other clients, it is describing employment regardless of its title.

What actually decides status

Outside Quebec, the CRA uses two steps. Step one asks what the parties intended, a contract of service or for services; a written agreement is one source of that intent. Step two tests whether the facts match, examining:

• 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, including the written contract itself.

Workers and payers may choose how to arrange their affairs, the CRA says, but the status must reflect the real relationship; all the facts decide. Our CRA worker classification walkthrough covers each factor.

Where a strong agreement genuinely helps

A good contractor agreement still helps three ways. It evidences common intent, step one of the test. It sets facts by default: a clause that the contractor supplies tools only helps if they do. And it gives you something to hand over if a ruling or audit lands, instead of reconstructing the relationship from memory.

A weak agreement does the opposite. A one-page template that recites “the parties agree the worker is an independent contractor” and says nothing about tools, subcontracting or risk contributes almost nothing to step one and nothing at all to step two.

The cost of getting it wrong

If a contractor is later found to be an employee, the payer generally owes the unremitted CPP contributions and EI premiums, both employer and employee shares, plus penalties and interest. Payroll obligations are retroactive; the worker’s invoices do not undo them. Employment standards exposure for vacation, statutory holiday and length-of-service pay may follow, plus a workers’ compensation question. For an incorporated worker with one client, the personal services business rules can deny most corporate deductions and apply a higher rate.

If you are genuinely unsure, ask

Either party can request a CPP/EI ruling through My Business Account, My Account, a representative, or Form CPT1. It states whether the employment is pensionable, insurable or both for a defined period, and is final unless appealed. Request it by June 29 of the year following the year in question. Asking admits nothing, and a ruling beats a confident opinion.

Practical drafting notes for owners

• Match the document to the reality, then keep them matched. Relationships drift. A contractor who gradually becomes a full-time fixture with a company laptop and set hours has changed status in substance whether or not anyone reissued the paperwork.
• Do not use an employment contract as a contractor agreement with the nouns swapped. The obligations run in different directions.
• Deal with GST/HST explicitly. A contractor over the registration threshold should be charging it, and that belongs in the fee clause.
• Remember the reporting. Construction payers have their own regime for reporting payments to subcontractors. See T5018 reporting.
• Get the termination language reviewed by a lawyer. This is where the money is, and it is not an accounting question.

The bottom line

Write the agreement for the relationship you intend, have a lawyer draft the clauses that carry legal risk, then run the relationship consistently. If reality and document diverge, reality wins. Still choosing a structure? Our comparison of hiring an employee versus a contractor sets out the cost and obligation differences.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and your situation is unique, so please speak with a CPA before acting on anything here.

Working through this locally? We advise owners on it as an Abbotsford small business accountant.