An independent contractor agreement is a written contract that sets out the terms under which a self-employed individual or business provides services to another party. Unlike an employment agreement, an independent contractor agreement establishes a commercial relationship between two independent parties — not an employer-employee relationship. Independent contractor agreements are common in industries that rely on freelance, consulting, or specialized service work, including technology, content creation, marketing, design, and software development.
Avoiding employment obligations. An independent contractor is afforded less legal protection than an employee protected by employment law. Independent contractor agreements can be easier to terminate, and the worker may not be entitled to minimum standards for vacation pay, termination notice, and severance.
Avoiding remittances and deductions. With an employee, the business is required to make remittances and deductions with the CRA including for income tax, CPP, and EI. An independent contractor files their own taxes and handles their own remittances and deductions.
Establishing intellectual property ownership. Under Canadian copyright law, the default rule is that an independent contractor retains ownership of the work they create — the opposite of the default for employees. If the hiring party wants to own the work product, the agreement must include a clear assignment of intellectual property rights.
Protecting confidential information. An independent contractor agreement should govern the use and disclosure of confidential information of both parties. Without a proper agreement in place, disputes can arise over topics like what information is confidential, how confidential information can be used, and who confidential information can be shared with.
Employment Standards Code, RSA 2000, c E-9. Alberta’s primary employment legislation. The Employment Standards Code applies to employees but not to true independent contractors. However, if a contractor is later reclassified as an employee, the hiring party may become retroactively liable for unpaid wages, vacation pay, overtime, termination notice, and other statutory entitlements under the Code.
Income Tax Act, RSC 1985, c 1 (5th Supp). Canada’s federal tax legislation. The Canada Revenue Agency applies a substantive test under the Income Tax Act to determine whether a worker is an employee or an independent contractor, and misclassification can result in liability for unremitted source deductions, penalties, and interest.
Copyright Act, RSC 1985, c C-42. Canada’s federal copyright legislation. Under the Copyright Act, the author of a work is generally the first owner of the copyright. For an independent contractor, this means the contractor — not the hiring party — owns the copyright in the work product unless the contract assigns it. This is the opposite of the default rule for employees.
Misclassifying an employee as an independent contractor. Calling someone an independent contractor in a written agreement does not make them one. Canadian courts and the Canada Revenue Agency apply a substantive test that examines control, ownership of tools, risk of loss, chance of profit, and integration into the business. Misclassification can result in liability for unpaid wages, vacation pay, source deductions, CPP and EI contributions, penalties, and interest.
Failing to assign intellectual property rights. In the absence of a clear assignment, an independent contractor generally retains ownership of the intellectual property they create. A hiring party that pays for a logo, software, or design work without an assignment may discover that they do not own the work — and that the contractor can use, license, or sell it to others.
Ambiguous scope of work. A poorly defined scope of work is one of the most common sources of dispute in independent contractor relationships. Without clear deliverables, milestones, and acceptance criteria, disagreements over what was promised, what counts as complete, and what falls within or outside the agreed fee are inevitable.
Treating the contractor like an employee in practice. Even with a well-drafted agreement, the parties’ actual conduct can undermine the contractor’s independent status. Setting fixed work hours, requiring the contractor to use the hiring party’s tools, controlling how the work is performed, and integrating the contractor into the hiring party’s organization are all factors that can lead to reclassification.
Ignoring the dependent contractor category. Canadian courts have recognized an intermediate category between employees and independent contractors known as “dependent contractors” — workers who are technically self-employed but who provide services almost exclusively to one client over an extended period. Dependent contractors are entitled to reasonable notice on termination, similar to employees, even though they are not employees in the strict sense.
What is the difference between an employee and an independent contractor? An employee works under the direction and control of an employer, typically on the employer’s premises and using the employer’s tools, and is integrated into the employer’s business. An independent contractor operates their own business, controls how the work is performed, and bears the risk of profit or loss. The distinction is determined by the substance of the relationship, not the label used in the contract.
Who owns the work an independent contractor creates? Under the Copyright Act, the contractor is generally the first owner of the copyright in the work they create. If the hiring party wants to own the work product, the independent contractor agreement must include an explicit assignment of intellectual property rights.
Do I need to deduct taxes for an independent contractor? Generally, no. Independent contractors are responsible for their own income tax, CPP, and GST obligations. The hiring party does not deduct source deductions or remit them to the Canada Revenue Agency. However, if the contractor is later reclassified as an employee, the hiring party can be held liable for unremitted source deductions.
Can an independent contractor be terminated without notice? A true independent contractor can generally be terminated in accordance with the terms of the contract, without the statutory or common law notice that applies to employees. However, if the worker is reclassified as an employee — or as a dependent contractor — they may be entitled to reasonable notice on termination.
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