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Hiring as a startup: Employee or independent contractor?

Startups need to have a thorough understanding of their obligations before hiring an employee or engaging the services of an independent contractor.

Determine which option best meets your short- and/or long-term business and operational requirements.

Hiring employees

  • Employers and employees have a “master/servant” relationship—the employer has the right to direct and control the type, manner and timing of the employee’s work.
  • Employees are economically dependent on the employer. They have certain entitlements under employment standards legislation (for example, minimum wage, overtime, vacation, statutory holidays and leaves).
  • Employees can be categorized as:
    1. Indefinite (full-time or part-time)—established start date with no set end date (employment continues until either party chooses to end the relationship)
    2. Fixed-term (full-time or part-time)—established start and end dates
  • Employers have statutory obligations with respect to salary deductions and remittances. They are also responsible for any notice and severance requirements as prescribed by employment standards legislation, at a minimum.

Hiring independent contractors

  • Independent contractors have no employment status. They are not entitled to participate in traditional employee benefits or other benefits prescribed under employment standards legislation.
  • Independent contractors often assume the risk of having the project or assignment cancelled midstream. They usually retain control over when, how and where work is completed.
  • Independent contractors are allowed to contract with other companies at the same time.
  • Independent contractors generally use their own equipment unless otherwise stipulated in the contract.
  • Independent contractors submit invoices to the company to receive payment for the work. After reaching the first $30,000 threshold, they must register with the Canada Revenue Agency (CRA) and obtain a GST/HST number. Independent contractors must then begin charging GST/HST and provide the company with this number when invoicing.
  • The company is not responsible for withholding, collecting and paying the independent contractor’s taxes nor any other payments required by the CRA.
  • The company is not obligated for any notice or severance obligations pursuant to employment standards legislation. The company may terminate the agreement with the independent contractor at any time (subject to the terms in the contract).

Employment status and taxation

Establish the status of each person working for your startup based on the facts, and not on how the person asks to be treated for tax purposes.

The CRA will ignore an individual’s designation as an independent contractor if there are indications that the individual is actually an employee in terms of tax purposes.

Treating an employee as an independent contractor can have negative consequences for your startup (for example, retroactive liability for failure to withhold and pay income taxes, Canada Pension Plan, Employment Insurance). Make sure you know the facts.


[download url=”” type=”doc”]Independent contractor agreement[/download]


Employee or Self-Employed? (n.d.). Retrieved February 25, 2009 from Canada Revenue Agency website,
General Information for GST/HST Registrants (n.d). Retrieved February 25, 2009 from Canada Revenue Agency website,