Employee Misclassification in Ontario
For Ontario employers, classifying workers correctly is critical. Misclassifying employees as independent contractors can lead to significant financial, legal, and reputational consequences.
Under Ontario’s Employment Standards Act, 2000 (ESA), workers are presumed to be employees unless the employer can prove otherwise. The Human Rights Code, Workplace Safety and Insurance Act (WSIA), and Canada Revenue Agency (CRA) regulations also apply, meaning multiple layers of potential liability.
With increased scrutiny from the Ministry of Labour, the CRA and the courts, proper classification is no longer optional; it’s a compliance necessity.
What Is Employee Misclassification?
Employee misclassification happens when an organization treats someone as an independent contractor when, in reality, that person functions as an employee.
The distinction matters because employees are entitled to statutory benefits such as:
- Minimum wage and overtime pay,
- Vacation and public holiday pay,
- Notice of termination or severance pay, and
- ESA-protected leaves.
Independent contractors, on the other hand, are considered self-employed and do not receive these entitlements.
Key Point for Employers
According to Budget 2025, misclassification, often used to avoid income tax, Canada Pension Plan (CPP), and Employment Insurance (EI) contributions, denies workers key legal protections and benefits.
The government also plans to increase penalties for wage theft, defined as the failure to pay workers compensation they are lawfully owed.
How to Tell the Difference
Ontario courts and regulators look at several key factors to determine if a worker is truly independent:
- Control: Does the employer direct how, when, and where the work is done?
- Tools and Equipment: Does the worker use company tools or systems?
- Integration: Is the worker part of the company’s structure (e.g., team meetings, company email)?
- Financial Risk: Does the worker have an opportunity for profit or risk of loss?
- Exclusivity: Does the worker serve multiple clients, or just one business?
No single factor is decisive; the total relationship matters.
Legal and Financial Consequences for Ontario Employers
ESA Penalties and Back Pay
If the Ministry of Labour finds that a contractor should have been classified as an employee, the employer may owe years of back pay, including:
- Overtime and vacation pay,
- Termination and severance pay, and
- Unpaid public holiday pay.
The Ministry can also impose administrative monetary penalties and issue compliance orders.
Wrongful Dismissal and ESA Claims
Misclassified workers can file:
- Wrongful dismissal lawsuits, claiming common law notice;
- ESA complaints for unpaid entitlements; and
- Human Rights applications, if discrimination or reprisal is alleged.
Even with a signed independent contractor agreement, courts may rule that the worker was effectively an employee, resulting in substantial damages.
Constructive Dismissal Risks
If an employer unilaterally changes a worker’s pay, duties, or classification status, that change may amount to constructive dismissal even if the employer intended to “correct” the relationship.
Tax and Payroll Liabilities
Employers found to have misclassified workers may owe:
- CPP contributions,
- EI premiums,
- Employer Health Tax, and
- WSIB premiums,
- plus penalties and interest under CRA and WSIB audits.
These costs can easily exceed what proper classification would have required.
How Ontario Employers Can Reduce Risk
To protect your business from misclassification penalties:
- Audit current relationships — Review how contractors actually work day-to-day.
- Use precise contracts — Ensure independent contractor agreements reflect true independence.
- Align practice with paper — The working reality must match the contract terms.
- Train managers and HR teams — Ensure hiring teams understand the legal test for employment.
- Seek legal advice — Especially when roles evolve or when converting contractors to employees.
Being proactive can prevent years of back pay, CRA penalties, or ESA enforcement.
How an Employment Lawyer Can Help
A qualified employment contract lawyer can:
- Review and update independent contractor agreements;
- Identify and correct existing misclassifications;
- Represent your business in Ministry or CRA audits; and
- Structure compliant hiring and engagement practices for the future.
If you’re facing a misclassified employee lawsuit or Ministry investigation, early legal advice can help minimize financial exposure and reputational damage.
Key Takeaways for Ontario Employers
- Misclassification can lead to ESA, tax, and human rights liability.
- The Ministry of Labour assumes workers are employees unless proven otherwise.
- Written contracts are not enough; the working relationship must align with legal standards.
- Conduct internal audits and seek legal guidance before disputes arise.
Protect Your Business with Legal Guidance
At Achkar Law, we help Ontario employers prevent and defend against employee claims of misclassification.
Our team advises on ESA compliance, contractor agreements, and workplace investigations, ensuring your business remains protected under Ontario law.
Contact Achkar Law today to speak with an employment contract lawyer about reducing risk and strengthening your compliance strategy.
The article in this client update provides general information and should not be relied on as legal advice or opinion. This publication is copyrighted by Achkar Law Professional Corporation and may not be photocopied or reproduced in any form, in whole or in part, without the express permission of Achkar Law Professional Corporation. ©