Employee vs. Contractor in Alberta: Avoid Costly Misclassification

Many Alberta businesses rely on a mix of employees and independent contractors. While contractors offer flexibility and reduced administrative burden, the line between employee and contractor status is not always clear—and misclassifying workers can have significant financial and legal consequences.

Whether you run a small business, a startup, or a growing corporation, understanding the difference between employees and contractors is essential. In this guide, we explain how Alberta law approaches worker classification, the risks of getting it wrong, and how to protect your business.

Why Classification Matters

How you classify a worker affects:

• Employment standards obligations
  
• Payroll deductions (CPP, EI, income tax)
  
• Overtime, vacation pay, and statutory holiday pay
  
• Termination notice or pay in lieu
  
• Workers’ compensation (WCB)
  
• Liability for wrongful dismissal
  

If the Canada Revenue Agency (CRA) or Alberta courts determine that a contractor was actually functioning as an employee, your business may owe back payments, penalties, and interest—sometimes tens of thousands of dollars.

Misclassification is one of the most common issues for Alberta businesses seeking legal advice, and it often arises because companies depend on outdated templates or assumptions about contractor status.

How Alberta Law Determines Worker Status

There is no single test used in Alberta to determine whether a worker is an employee or an independent contractor. Instead, the CRA and courts look at the entire relationship, including:

1. Control

Who decides how, when, and where the work is performed?

• Employees typically follow employer direction.
  
• Contractors control their own schedules and workflow.
  

2. Tools and Equipment

Who provides the necessary tools?

• Employees rely on the employer’s tools.
  
• Contractors bring their own equipment and resources.
  

3. Financial Risk and Opportunity

Contractors should:

• Invoice for services
  
• Carry business insurance
  
• Have the potential to profit—or risk a loss
  

Employees typically do not face financial risk beyond wage variability.

4. Integration

Is the worker essential to the company’s core operations?

• Highly integrated workers are more likely to be employees.
  

5. Exclusivity

Do they work only for you?

• Contractors generally serve multiple clients.
  

If your contractor arrangement does not clearly meet these criteria, your “contractor” may legally be considered an employee.

The Hidden Cost of Misclassification

Misclassification can expose Alberta businesses to:

1. CRA Penalties

If CRA finds that a contractor should have been an employee, the business may owe:

• Unpaid CPP and EI contributions
  
• Back taxes
  
• Penalties and interest
  

This can reach tens of thousands of dollars, especially if multiple workers are affected.

2. Liability Under Employment Standards

Employees are entitled to:

• Overtime pay
  
• Vacation pay
  
• General holiday pay
  
• Minimum wage
  
• Termination notice or pay in lieu
  

A misclassified worker may retroactively claim unpaid benefits or file a complaint.

3. Wrongful Dismissal Claims

Contractors are not owed notice when you end the relationship.
Employees are.
If a contractor is later deemed an employee, they may claim:

• Reasonable notice (often months of pay)
  
• Damages
  

This is one of the most expensive consequences for Alberta employers.

4. WCB Premiums and Liability

If a worker is injured and WCB determines they were actually an employee, your business may be liable for unpaid premiums and penalties.

Why Businesses Accidentally Misclassify Workers

Misclassification is rarely intentional. Common reasons include:

• Using outdated contractor templates found online
  
• Wanting to speed up hiring without onboarding paperwork
  
• Hiring former employees as “contractors” to save costs
  
• Assuming contract language alone determines status
  
• Treating long-term contractors as part of the regular team
  

Courts look beyond contract wording. Even if your agreement calls someone a contractor, their day-to-day work relationship may tell a different story.

Best Practices for Avoiding Misclassification

1. Use Clear, Legally Sound Agreements

A proper independent contractor agreement should include:

• Defined scope of work
  
• Payment terms and invoicing
  
• Contractor’s control over tools, schedule, and process
  
• Requirement to maintain business insurance
  
• Confirmation that the contractor can work for other clients
  

Generic templates often fail to address these points.

2. Ensure the Working Relationship Matches the Agreement

If you treat a contractor like an employee, the contract becomes irrelevant.
Your business must:

• Avoid directing their daily tasks
  
• Avoid integrating them into core operations
  
• Avoid giving them employee-style hours or supervision
  

Consistency between paper and practice is critical.

3. Consider Incorporation

Many Alberta businesses hire contractors who operate through their own corporations.
This can reduce misclassification risk—but only if the relationship still reflects true contractor status.

4. Seek Legal Review Before Hiring

A quick contract review by an employment lawyer can prevent costly mistakes.
This is especially important if the contractor will work long-term, full-time, or in a role similar to existing employees.

When to Consult an Employment Lawyer

You should seek legal advice if:

• You are hiring a contractor for an ongoing or full-time role
  
• You want to convert an employee to contractor status
  
• You have contractors working only for your business
  
• You are unsure how to structure payment or supervision
  
• CRA has contacted you about a worker
  
• A contractor has filed a claim or complaint
  

An employment lawyer can help you design contractor relationships that are legally defensible, compliant, and aligned with your business needs.

Protect Your Business From Misclassification Risks

Worker classification issues often arise years after hiring—when a dispute, claim, or audit brings the problem to light. Taking proactive steps now can save your business significant financial and legal exposure.

Libra Law advises Alberta businesses on employment contracts, contractor agreements, compliance, and strategies to minimize risk. Our team ensures your agreements are clear, enforceable, and tailored to your operations.

Book a Consultation

If you want to ensure your worker arrangements are compliant and cost-effective, our Employment Law team can help.

Learn more or book a consult:
https://libra-law.ca/service/employment-law

This article is for general informational purposes only and does not constitute legal advice. To obtain advice specific to your situation, please consult a lawyer or qualified professional.