There's usually a definition or test, either in statute or case law. In my jurisdiction, whether you have a boss or supervisor is a major factor. Contractors are given a specific task to complete and then they go do it. If you're getting daily monitoring or tasks assigned throughout the day, you're probably an employee.
Like with not paying minimum wage or illegal deductions, employers often get away with it. The power imbalance is very large for such workers, and even when enforced the fines are often just a cost of doing business. In Ontario, Canada there's a couple billion dollars in unpaid wages every year, and hundreds of investigations for wilful wage nonpayment by managers, yet there has been exactly one jail sentence for it, in the last twenty years. With odds like that, I might steal too!
Source: Have done so and won.
I think you would be shocked at how often this happens.
I once had a major Canadian bank try to make me buy a cell phone so they could avoid a minimal monthly charge for one??
HR in Canada is rife with abuse, because they are under no obligation to tell you what the laws actually are. Your ignorance of the laws works to their advantage.
See "non disclosure agreements" in Canada for a prime example.
This issue came up a lot with work from home during the pandemic. Did your power bill go up from running your employer-provided hardware at home? In some jurisdictions, they have to compensate you even for that.