What's the Difference Between an Employee and an Independent Contractor?

What Actually Separates the Two

An employee works within a business under its direction, while an independent contractor runs their own business and is engaged to deliver a result. Federally, Ontario, and Alberta all treat this as a factual question about the real working relationship rather than something a contract can simply declare. In Alberta, a worker is treated as an independent contractor and falls outside the province’s employment standards legislation only when they meet conditions such as supplying their own tools and equipment, providing their own benefits and training, and making their own tax deductions. A contract that uses the word “contractor” does not by itself satisfy those conditions.

Why the Contract Label Doesn’t Decide It

In Ontario, the Employment Standards Act (ESA) applies only to employees, not to independent contractors, volunteers, or others outside its coverage. The Ministry of Labour is explicit that it is the relationship between the individual and the business that matters, not the label given to it in a contract. To sort out that relationship, Ontario applies common-law tests developed through Ontario Labour Relations Board decisions, examining the substance of how the work actually happens rather than how the paperwork describes it.

Ontario uses a similar approach for the Employer Health Tax (EHT). Because the EHT Act does not define the employment relationship itself, the Ministry falls back on common-law principles, and the key question becomes whether the person is engaged as an independent contractor in business on their own account, or as an employee. The same underlying inquiry, real relationship over label, shows up across different Ontario statutes.

How the CRA Rules on Status for Tax Purposes

Federally, the Canada Revenue Agency’s older guidance publication on this topic (RC4110, “Employee or Self-employed”) was cancelled and replaced with newer guidance titled “Employment status: Employee or self-employed.” Where a business or worker needs certainty, the CRA can issue a formal CPP/EI ruling: an official decision made by an authorized CRA officer that determines whether a worker’s employment is pensionable under the Canada Pension Plan, insurable for Employment Insurance, or both, and whether CPP contributions or EI premiums are owed.

Because a CPP/EI ruling is a formal, binding determination rather than a guess, it can settle a status dispute for tax and deduction purposes before it turns into a larger payroll problem.

Alberta’s In-Between Category: the Dependent Contractor

Alberta’s employment standards rules exclude independent contractors entirely, provided the contractor genuinely supplies their own tools and equipment, benefits, training, and tax deductions. But Alberta’s Labour Relations Code also recognizes a third category, the “dependent contractor,” defined as a person who performs work for another party under terms where the worker is in a position of economic dependence on that party and under an obligation to perform duties that more closely resembles an employee relationship than that of an independent contractor. This dependent contractor definition sits inside the Code’s statutory definition of “employee,” meaning a worker who is technically engaged as a contractor but relies heavily on one payer may fall outside the simple employee/contractor divide altogether. Ontario’s primary sources supplied here do not include an equivalent statutory dependent contractor definition, so that specific category should not be assumed to apply the same way in Ontario without checking the relevant Ontario statute directly.

What This Means Day to Day

Across all three jurisdictions covered here, federal, Ontario, and Alberta, the paperwork is a starting point, not the final word. Ontario’s ESA and EHT guidance both point to the same real-relationship test; Alberta’s employment standards rules exclude only contractors who truly meet the independence conditions, while its Labour Relations Code carves out a dependent contractor middle ground; and federally, a CRA ruling can pin down the tax and deduction consequences of any given arrangement. Where a working relationship looks different in practice than it does on paper, in either province or under CRA review, it is the practice that controls.