Subcontractor or employee: why the contract does not answer it

"Independent contractor" written at the top of an agreement is a description, not a determination. The Supreme Court of Canada said so in the case that still governs the question, and it said so about a contract that used exactly that phrase.

For a construction business this matters more than for almost any other industry, because construction runs on subcontracting and because the facts of a construction site — the hiring firm's schedule, the hiring firm's supervisor, the hiring firm's core trade — point in the direction the analysis is looking.

The two statutes that create the obligation

Nothing in Canadian law says "you must classify workers correctly". Two federal statutes simply attach obligations to a particular kind of relationship, and the classification question is what decides whether you are in it.

Canada Pension Plan, section 6:

"Pensionable employment is (a) employment in Canada that is not excepted employment; (b) employment in Canada under Her Majesty in right of Canada that is not excepted employment; or (c) employment included in pensionable employment by a regulation made under section 7."

Employment Insurance Act, section 5(1)(a):

"employment in Canada by one or more employers, under any express or implied contract of service or apprenticeship, written or oral, whether the earnings of the employed person are received from the employer or some other person and whether the earnings are calculated by time or by the piece, or partly by time and partly by the piece, or otherwise"

Read the qualifiers in that sentence, because each of them closes a door somebody has tried to walk through:

• "express or implied" — there does not have to be a document.
• "written or oral" — a handshake is a contract of service if that is what it is.
• "whether the earnings … are received from the employer or some other person" — routing payment through a third party changes nothing.
• "calculated by time or by the piece" — paying by the square metre instead of by the hour does not convert employment into subcontracting.

A contract of service is employment. A contract for services is a commercial relationship with a business. One word apart, and the difference is payroll withholding, CPP contributions, EI premiums and a T4.

What the Supreme Court actually said

The governing authority is 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59, [2001] 2 S.C.R. 983. The passage that gets cited in every subsequent case:

"There is no one conclusive test which can be universally applied to determine whether a person is an employee or an independent contractor. What must always occur is a search for the total relationship of the parties. The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account."

Then the factors:

"In making this determination, the level of control the employer has over the worker's activities will always be a factor. However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker's opportunity for profit in the performance of his or her tasks."

And, on the contract itself: although the agreement in that case designated the party as an "independent contractor", the Court observed that "this classification is not always determinative."

The Court drew on the line of authority running through Wiebe Door Services Ltd. v. M.N.R., Montreal v. Montreal Locomotive Works Ltd., Market Investigations, Ltd. v. Minister of Social Security and Lee Ting Sang v. Chung Chi-Keung — the reason the same four factors keep appearing in every checklist you have ever seen.

The factors, translated to a construction site

The two rows that decide most real cases are financial risk and opportunity for profit. A trade paid by the hour, using the general's equipment, with no exposure to a bad estimate, has no way to be "in business on his own account" — whatever the paperwork says. A trade quoting a fixed price, carrying insurance, and losing money if the estimate was wrong, is.

Where this is expensive

Getting it wrong is not a filing error. It produces an assessment for the employer's share of CPP and EI plus the amounts that should have been withheld from the worker, and it reaches backward.

And it produces a second problem that is often larger: a T5018 does not fix it. Reporting a payment under section 238 of the Income Tax Regulations records what you paid to a person for goods or services rendered in the course of construction activities. It is a reporting obligation, not a characterization of the relationship — the filing obligation itself is a separate question, covered in T5018: primarily construction income means reporting your subs. A person reported on a T5018 who was in fact working under a contract of service was always an employee, and the return is evidence of the payment, not a defence.

Three different answers to what looks like one question

This is the part contractors find hardest to accept: a single worker can be classified differently under three regimes at once, because the regimes are asking different questions under different statutes.

• CPP and EI — the Sagaz analysis: is this person in business on their own account?
• Provincial employment standards — each province's own definition, applied by its own ministry.
• Workers' compensation — provincial, and in Ontario construction it does not ask the question at all. Section 12.2 of the Workplace Safety and Insurance Act simply deems every independent operator, sole proprietor, partner and executive officer carrying on business in construction to be a worker to whom the insurance plan applies — the full deeming rule and its narrow home-renovation exemption are in WSIB in Ontario construction: sole proprietors are deemed workers.

So an Ontario framing sub can be a genuine independent contractor for CPP and EI purposes and a deemed worker for WSIB purposes, simultaneously, and both are correct. Anyone who tells you there is one answer has not read the second statute.

What to do about it

The analysis looks at the total relationship. That means the evidence is your operating practice, not a clause.

1. Quote and contract by scope and price, not by hourly rate, where the relationship really is subcontracting.
2. Require the sub's own insurance and warranty. This is the financial risk factor in documentary form, and it is the one that carries weight.
3. Require the sub's own clearance certificate from the relevant provincial board — in Ontario, before they begin work.
4. Do not supply their tools or their crew. Two factors, both easy to get wrong out of convenience on a busy job.
5. Keep a written subcontract per job, with a defined scope. "Express or implied, written or oral" cuts both ways; a written contract with a real scope is evidence.
6. Collect the legal name and business number at the start — for the T5018, and because a subcontractor who has neither is not obviously in business on their own account.

None of that is a formality. It is the record of what the relationship actually was, assembled while it was happening rather than afterwards.

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Current as of August 29, 2026. This article describes the federal test for employment status for CPP and EI purposes and is not legal or tax advice. It does not cover the CRA's ruling process, the specific rules for placement and employment agencies, excepted employment, provincial employment standards legislation, Quebec's own regime for QPP and its parental insurance plan, or the consequences of a reassessment. The classification question is fact-specific; the same facts have produced different outcomes in different cases. The sources quoted above were checked on the date shown.

What Zirko does: it keeps a record per business partner with company data and documents, and it produces quotes and invoices with individual positions carrying scope, quantity and price — which is the form a fixed-price subcontract takes. Zirko does not classify workers, does not run payroll, does not calculate CPP or EI and gives no legal advice. Issued documents are immutable; a correction is a separate document.