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Employee or Independent Contractor? What the Varga Decision Means for Canadian Small Businesses

SINC Support Team
SINC Support Team
Aug 27th, 2026
payrollCanada

Worker classification is one of those decisions that can affect payroll, documentation, and the cost of correcting an error later. For Canadian small businesses, the question is especially important when a person works regular hours but is paid as a contractor.

A recent Tax Court of Canada decision provides a useful reason to review how those decisions are made. In Varga v. The King, 2026 TCC 138, the Court found that an office assistant who worked at a chiropractic clinic for nearly two years was an independent contractor rather than an employee. The case came to the Court on appeal from the CPP/EI Rulings Division.

The decision does not make every similar worker a contractor. It does, however, show why businesses should look at the complete working relationship instead of relying only on a job title, an invoice, or the fact that a worker is paid by the hour. The source article from Mathews Dinsdale provides the background to the decision.

Start With The Working Relationship, Not The Label

The first step is to describe what actually happens during the workweek. A written agreement is useful, but the day-to-day relationship should support the classification being used.

For each hourly worker, ask:

  • Who decides when the person works?
  • Who assigns tasks and sets priorities?
  • How closely does the business direct the method of completing the work?
  • Can the worker turn down assignments or work for other clients?
  • Who provides the tools, equipment, workspace, and systems?
  • Is the worker responsible for correcting work or dealing with business expenses?
  • Does the person have a real opportunity for profit or a risk of loss?

These questions focus on control and the practical structure of the engagement. A contractor arrangement may look different from an employment arrangement, but the distinction should be visible in the way the work is organized.

This is also where small businesses should be careful with hourly roles. Tracking time is not, by itself, a complete answer to worker status. An hourly rate can be used in different types of working relationships. The important issue is how the person operates within the business and what both sides agreed the relationship would be.

Review Integration And Intent Together

Control is only one part of the review. Consider how integrated the worker is into the business.

A person who performs a regular function, follows the same internal processes as staff, uses company systems, and appears to customers as part of the business may be more closely connected to the organization. That does not automatically determine the answer, but it is information worth documenting.

At the same time, consider the parties’ intention. What did the business and the worker understand the relationship to be when they started? Was that understanding recorded in writing? Did both sides consistently act in a way that matched the agreement?

The Varga decision is a reminder that intention can be part of the analysis. It should not be treated as a shortcut, however. Calling someone an independent contractor does not settle the question if the actual working arrangement points in another direction. Conversely, a business should not assume that every regular or long-term worker must be treated the same way without reviewing the full relationship.

A practical review should therefore compare three things:

  1. What the contract or engagement letter says.
  2. What the business and worker intended at the start.
  3. What actually happens in daily operations.

If those three descriptions are consistent, the classification decision is easier to explain. If they conflict, that is a reason to pause and obtain professional advice before continuing with the same arrangement.

Build Documentation Before There Is A Question

Documentation should be created during the relationship, not assembled only after a payroll or tax concern arises. Keep the agreement, invoices, records of assignments, and relevant communications together. The goal is not to create paperwork for its own sake. It is to preserve a clear record of how the relationship was structured and how it operated.

A useful file might include:

  • The signed agreement and any amendments.
  • A description of the services and expected deliverables.
  • Information about who supplies equipment and systems.
  • The worker’s invoicing records.
  • Notes about schedule flexibility and how assignments are accepted.
  • Records showing whether the arrangement changed over time.

Small businesses can also review their contractor agreements alongside the guidance in Creating And Interpreting Subcontractor Agreements. The article is not a substitute for advice on Canadian classification, but it can help identify whether an agreement clearly describes the business relationship.

Documentation should not say one thing while operating procedures say another. For example, an agreement may describe an independent service provider, while managers treat the person exactly like an employee without recording why. That gap can make the classification harder to defend.

Check The CPP And EI Consequences

The classification decision can affect whether payroll deductions and contributions connected with CPP and EI should have been handled differently. That means a review should not stop at the contract or the worker’s invoice.

Look at how the person has been paid, what records have been kept, and whether the business has treated similar workers consistently. If the classification is uncertain, avoid making a rushed change based on a single fact. Instead, gather the documents, record the relevant working practices, and seek advice from a qualified Canadian payroll or employment professional.

Accurate time and payment records are still important in either arrangement. SINC’s guide on 5 Tips on How To Eliminate Payroll Mistakes offers practical ways to reduce errors in payroll processes. For hourly teams, consistent records can also make it easier to identify changes in hours, duties, or supervision that may require a classification review.

A Practical Next Step For Small Businesses

Choose a few current hourly engagements and review each one using the same checklist: control, integration, intention, documentation, and CPP/EI treatment. Do not rely only on the worker’s title or the format of the invoice. Compare the written agreement with the actual working relationship, and note any differences.

The Varga decision is useful because it shows that worker status may require a close look at the complete relationship. For a small business, the safest process is a consistent one: document the original arrangement, monitor how it develops, and ask for professional guidance when the facts do not fit neatly into one category.