Practical guidance for US companies hiring their first Canadian employee or contractor. Reasonable notice, worker classification under Canadian law, equity grants, restrictive covenants, and the permanent-establishment trap most US-drafted employment agreements walk straight into.
Hiring a Canadian employee is one of the most common cross-border legal questions US companies bring to Canadian counsel — and it is the one where US-drafted templates most reliably go wrong. The US employment-law defaults (at-will employment, two-week notice, broad non-competes, simple W-2 payroll) are fundamentally different from the Canadian defaults. Anything ported directly from a US handbook will either be unenforceable, expensive on termination, or both.
This article walks through what US companies need to know to hire their first Canadian employee or contractor cleanly: the structural questions to settle up front, the doctrinal differences from US law, the contract terms that matter most, and the tax and permanent-establishment issues that turn a simple hire into a structuring decision.
Before drafting any agreement, the US company has to decide how the Canadian worker will be engaged. There are three practical structures:
Each structure has different tax, payroll, employment-law, and risk implications. The right answer depends on the role, the work pattern, the equity question, and the long-term plan. The most expensive mistake is to default to "contractor" because the paperwork is simpler — Canadian law applies a substance-over-form test that does not care what the contract calls the relationship.
Canadian courts and the Canada Revenue Agency apply a multi-factor common-law test to determine whether a worker is genuinely a contractor or is, in substance, an employee. The factors include:
If a relationship that is labelled "contractor" looks like an employment relationship on these factors, Canadian courts and the CRA will treat it as employment. This matters because misclassification has severe consequences:
For most US companies hiring a remote Canadian who works full time on the US company's systems and is integrated into US team meetings, the correct classification is employee — even if "contractor" is administratively easier.
In the United States, employment is at-will in most states. The employer can terminate the relationship at any time with no notice, and the standard severance package — if any — is governed by contract and policy, not background law.
Canadian common law is fundamentally different. Every non-Quebec Canadian employee is entitled, on termination without cause, to reasonable notice at common law — a judicially-determined period of notice (or pay in lieu) calibrated to the employee's age, length of service, position, and the availability of comparable employment. For a senior employee with 10+ years of service, reasonable notice can be 18 to 24 months. For an early-career engineer with 2 years of service, it might be 4 to 6 months. The Bardal factors that drive this calculation are well established and produce predictable results.
This obligation is in addition to the minimum statutory notice required by provincial employment standards legislation (which is typically much shorter — 1-8 weeks). Statutory minimums are a floor, not a ceiling.
A properly drafted termination provision in the employment agreement can override the common-law reasonable notice obligation and substitute a contractually-defined notice period (typically the statutory minimum plus some negotiated additional notice). However, Canadian courts have struck down a large number of termination clauses in recent years for being technically defective, with the result that the employer must pay full common-law reasonable notice — often many months more than the contract intended.
The 2020 Ontario Court of Appeal decision in Waksdale v. Swegon North America Inc. changed the landscape: if any part of the termination provision is unenforceable (for example, a "termination for cause" clause that violates the Employment Standards Act in any technical respect), the entire termination provision is void — including the parts that would have been enforceable. The result is reasonable notice at common law, which can be expensive.
Subsequent cases (including Rahman v. Cannon Design Architecture Inc. and a line of Ontario decisions through 2024 and 2025) have tightened the rules further. The practical implication is that termination provisions drafted before about 2021 are almost certainly defective under current law, and even recent drafting is regularly struck down.
A US company hiring its first Canadian employee should treat the termination provision as the single most important clause in the employment agreement, and should have it reviewed by Canadian counsel rather than ported from a US template. The cost of getting it wrong, in a hypothetical termination two or three years later, can be many multiples of what the entire engagement letter would have cost.
US companies routinely grant stock options, RSUs, or other equity to employees as part of compensation. The tax treatment of these grants in Canada is different from the US and depends on the form of equity, the timing of vesting and exercise, and whether the Canadian employee is grant under a "qualifying" plan under the Income Tax Act (Canada).
The equity grant terms should be reviewed by Canadian counsel (and coordinated with the US company's tax advisors) before issuance to a Canadian employee. Common US-side equity plan documents are usually silent on Canadian tax — which is acceptable, but the grant notice should specifically address Canadian tax treatment, withholding, and reporting.
US employment templates routinely contain broad non-competition, non-solicitation, and non-disclosure covenants. Canadian common law has historically been skeptical of non-competition clauses in employment contracts, treating them as restraints of trade that are unenforceable unless reasonable in scope, duration, and geography. The 2009 Supreme Court of Canada decision in Shafron v. KRG Insurance Brokers tightened this further.
Then in 2021, Ontario went further: the Working for Workers Act, 2021 made non-competition clauses in most employment contracts in Ontario void (with narrow exceptions for executives and on the sale of a business). For employees hired in Ontario after October 25, 2021, a non-compete clause is unenforceable as a matter of statute.
What works:
What does not work:
A Canadian employee can, in certain circumstances, create a "permanent establishment" of the US company in Canada under the Canada-US Tax Treaty. The consequences of permanent establishment include Canadian corporate income tax on income attributable to the Canadian establishment, GST/HST registration obligations, and additional payroll and reporting requirements.
The risk is highest when the Canadian employee:
For lower-risk hires (an individual contributor engineer doing remote work from their home, for example), the permanent establishment risk is typically modest but not zero. For higher-risk hires (a Canadian sales lead with authority to close deals, a country manager, a regional VP), the risk is real and may be the reason to establish a Canadian subsidiary rather than employ the worker directly from the US entity.
Each Canadian province has its own employment standards legislation governing minimum wage, hours of work, overtime, vacation pay, statutory holidays, parental leave, and minimum termination notice. These are mandatory minimums — they cannot be waived or contracted around. The applicable legislation depends on where the employee works, not where the employer is located.
For most US companies, the practical issues are:
This article is general information, not legal advice for any specific situation. If you would like Canadian-law assistance with hiring a Canadian employee, structuring a Canadian subsidiary, or reviewing employment agreements, contact koby@canadianattorney.com.
Employment agreement drafting, contractor classification, equity addendum review, or full Canadian subsidiary setup. Initial consultations are short and no-cost.
Get in Touch