Canada Employee Misclassification: Risks & Best Practices

Hiring in Canada comes with a major compliance challenge: employee misclassification. Many businesses assume that labeling someone as a contractor keeps things simple, but Canadian regulators—especially the Canada Revenue Agency (CRA) and provincial courts—look beyond contracts to the actual working relationship.

Get it wrong, and the consequences are steep: back pay, unpaid overtime, vacation liabilities, CRA penalties, and even lawsuits. Courts have consistently held employers accountable, and even a single misclassified worker can cost tens of thousands of dollars.

This article is designed for HR leaders, founders, and global hiring teams who need to understand the risks and avoid costly mistakes. You’ll learn how regulators assess classification, the penalties of misclassification, and the best practices that protect businesses operating in Canada.

With Deel’s expertise—and safer hiring options like an Employer of Record (EOR)—companies can compliantly scale in Canada without exposing themselves to financial or legal fallout.

What is employee misclassification?

Employee misclassification occurs when a worker is engaged as an independent contractor but, under Canadian law, should actually be classified as an employee.

Canadian regulators, including the Canada Revenue Agency (CRA) and provincial courts, closely examine the reality of the working relationship rather than the terms of a contractor agreement. Employers who misclassify workers may face financial penalties, reputational harm, and legal action from employees or authorities.

Employee vs. contractor in Canada: The basics

Canadian regulators and courts apply several key factors when assessing worker classification. No single factor is determinative—the overall relationship matters most.

The main considerations include:

• Control: Employees are typically subject to direction and supervision; contractors enjoy greater autonomy
• Ownership of tools and equipment: Contractors usually supply their own tools, while employees are given the necessary resources by their employer
• Chance of profit and risk of loss: Contractors assume business risks and can make profits (or losses), while employees typically receive a fixed wage or salary
• Integration: Employees are integrated into the business, while contractors usually work on specific tasks or projects
• Payment terms: Employees are generally paid a regular wage or salary, whereas contractors are paid per project or hourly
• Subcontracting: Contractors may subcontract their work, but employees must perform their duties personally

Taken together, these criteria help regulators determine whether a worker should be classified as an employee.

See also: How To Determine Employment Status with Deel’s Worker Classifier

Risks of employee misclassification in Canada

Employers in Canada face serious financial and legal risks if they misclassify employees:

• Financial risks: Liability for back wages, unpaid overtime, vacation pay, and benefits
• Legal risks: Penalties and fines imposed by the CRA and provincial regulators
• Business risks: Lawsuits from workers and reputational damage that can disrupt operations

Even well-intentioned companies can face consequences if a worker relationship is structured incorrectly. For that reason, many companies in Canada have expanded using an EOR model to avoid these risks.

See also: How to Hire and Pay International Contractors Legally

Employee misclassification penalties in Canada

If an independent contractor is reclassified as an employee, Canadian employers may face:

• Liability for back pay and benefits
• Retroactive payment of employer contributions to employment insurance, pensions, and taxes
• CRA fines and penalties
• Legal damages ordered by the courts

Key cases illustrate the risks:

• 2017, British Columbia Supreme Court: An employer was ordered to pay 12 months’ notice to a worker who had been misclassified
• 2022, Ontario Superior Court of Justice: An employer was ordered to pay $65,000 CAD in damages to a misclassified worker

These cases demonstrate that courts take a strict view of misclassification and hold employers accountable.

See also: Employee Misclassification Penalties: Examples and Protections

Best practices to avoid misclassification

To reduce risk in Canada, employers should:

• Review contracts to ensure they reflect the actual working relationship
• Train HR and hiring managers on worker classification criteria
• Conduct regular audits of contractor arrangements
• Seek legal or compliance reviews before engaging independent contractors

Consider using an Employer of Record where classification risk is high

See also: How to Hire Using an Employer of Record in Canada (2025 edition)

Employer of Record hiring in Canada

For companies looking to eliminate misclassification risk, an Employer of Record is often the safest option.

With Deel EOR in Canada:

• We become the legal employer of your workers
• We handle payroll, taxes, benefits, and compliance
• You maintain day-to-day control of the work while staying compliant

This approach allows you to scale quickly and compliantly in Canada, without exposing your business to CRA penalties or lawsuits.

See also: What Is an Employer of Record (EOR)? A Complete Guide

Signs of misclassification

If your contractor arrangements in Canada look like this, you may be at risk:

• Contractor works exclusively for your company
• You control their schedule and supervise daily work
• They use company-provided tools and equipment
• They are deeply integrated into your organization

Spotting these red flags early can help prevent disputes and penalties.

See also: How to Convert a Contractor to an Employee Fast and Seamlessly

Prevent employee misclassification in Canada

Protecting your business requires ongoing vigilance. To stay compliant:

• Conduct internal audits of contractor relationships
• Use compliance platforms like Deel to assess classification risk
• Where risk is high, opt for safer hiring structures such as Deel EOR

By embedding compliance into workforce planning, you reduce the risk of costly misclassification penalties while keeping hiring agile.

See also: Mastering Global Employment Status: A Guide to Worker Classification

Hire Canadian talent compliantly with Deel EOR

In Canada, misclassification risk is high and actively enforced. Since regulators look beyond contracts to the real nature of work, businesses face uncertainty when hiring contractors.

With Deel EOR, you can:

• Hire Canadian talent without setting up a local entity
• Offload compliance, payroll, and HR responsibilities
• Minimize legal and financial risks while scaling globally

Book a quick demo to see how Deel helps you hire and retain top Canadian talent compliantly.