The much-awaited updated Code of Practice on Determining
Employment Status (the “Code”) which is available here, was published in October 2024 after a
review by an interdepartmental group comprising of the Department
of Social Protection, the Revenue Commissioners and the Workplace
Relations Commission (the “WRC”). This review was carried
out in response to the Supreme Court’s decision in The
Revenue Commissioners v Karshan (Midlands) Ltd t/a Domino’s
Pizza where it was found that Domino’s Pizza delivery
drivers were, in fact, employees and not independent contractors.
In this article, we look at what the Code says and how it can help
employers to assess the often tricky question of determining
employment status.
While the seminal decision in Karshan related to the
tax treatment of workers in the food delivery sector, the judgment
outlined five questions which should be considered more widely in
deciding whether, in any given case, an individual is an employee.
Revenue subsequently published Guidelines for Determining
Employment Status for Taxation Purposes (the
“Guidelines”) which is available here, and the Code should be read in
conjunction with these Guidelines also.
Why is employment status important?
It is important to ensure that workers are correctly classifieda
in a way that matches the reality of the relationship between the
individuals and the business as the misclassification of a worker
as being self-employed when they are actually employees, can leave
organisations exposed to significant potential risk of employment
claims and can prove quite costly.
In a previous insight, we looked at some recent
decisions of the WRC which highlighted the risks associated with
engaging self-employed contractors and the importance of carefully
reviewing workplace arrangements to avoid misclassification
claims.
Determining employment status
There are several different statutory bodies in Ireland which
can determine the question of an individual’s employment
status, depending on how the question arises and the particular
functions for which the statutory body has responsibility. These
are:
- The Department of Social Protection – which determines
employment status with a view to deciding the appropriate class of
PRSI for an individual. - The Office of Revenue Commissioners – where the question
of employment status determines the appropriate tax treatment (such
as in Karshan). - The WRC – which frequently determines employment status as a
preliminary issue when adjudicating on various employment rights
complaints.
There is not a single, clear legal definition of the terms
“employed” or “self-employed” in Irish law or
EU law. Therefore, in order to determine a person’s employment
status, both the written or oral contract and the reality of the
relationship behind the contract will be taken into consideration.
The purpose of the Code is to help organisations with this
assessment.
Questions to be considered – the five-step framework
The Code reflects the five-step test formulated by the Supreme
Court in the Karshan judgment which provided a clear
decision-making framework to determine the employment status of
each worker taking account of their facts and circumstances.
The question of whether a worker is an employee can be resolved
by first having regard to the following three ‘filter’
questions:
1. Does the contract involve the exchange of
wage or other remuneration for work?
2. If so, is the agreement one where the worker
is agreeing to provide their own services, and not those of a third
party, to the business?
If so, does the business exercise sufficient control over the
worker to render the agreement one that is capable of being an
employment agreement?
3. If any one of these questions is answered
negatively, it means that there can be no contract of
employment.
4. If these three requirements are met, then
the decision maker must determine whether all the circumstances of
the arrangement or contract, interpreted in the light of the
practical/real conditions of engagement (the “factual
matrix”) are consistent with a contract of employment, or with
some other form of contract having regard, in particular, to
whether the arrangements point to the worker working for themselves
or for the business/employer.
5. Finally, it should be determined whether
there is anything in the particular legislative regime under
consideration that requires a particular approach to be taken,
e.g., a person might be an employee for social insurance purposes
but self-employed for employment law or tax purposes.
Exchange of wage or other remuneration for
work
The first question a decision maker must consider, is whether
the parties have entered into a contract of employment (whether
expressed or implied). For a contract of employment to exist, there
must be an offer of work, acceptance of that offer and resulting
payment or “consideration”. As determined by the Supreme
Court in Karshan, one single engagement or a series of
separate engagements where consideration is offered and accepted in
exchange for work being performed can result in contracts of
employment.
Personal Service
This second question considers whether and to what extent the
worker has agreed to provide their service to the business
personally. This is also known as the “substitution
test”. This question concerns a worker’s right to appoint
someone else as a substitute to do the work. Even if the worker
arranges for a substitute, a crucial aspect in evaluating the
extent of substitution permitted is whether, and to what degree,
the person or business offering the work has influence over the
worker’s choice of hire. The greater the limitations placed on
a worker’s ability to appoint a substitute, the more it
suggests that the arrangement is a contract of employment.
Control
The right of the business to exercise control over the worker is
more relevant than whether they actually exercise this right. The
actual degree of control will vary with the type of work and the
skills of the worker. When a business is considering the issue of
“control”, a decision maker may also have regard to the
issues of enterprise and integration. Enterprise refers to the
extent to which the worker carries risk and their ability to make
financial gain through own ingenuity/efficiency. Integration is the
extent to which a worker is an integral part of the operations of
the business, as opposed to carrying out work that, although done
for the business, is peripheral or accessory to it.
All the circumstances of the
engagement
If the first three “filter” questions are answered
affirmatively, consideration then needs to be given to the entire
factual matrix of the engagement between the parties. Even though a
detailed written agreement may describe a relationship in a
particular way, if the day-to-day reality is quite different then
this written contract may be disregarded.
The legislative context
Consideration also needs to be given to any legislation that
requires an adjustment or supplement to any of the foregoing
questions in the particular circumstances of the relationship being
considered. The WRC determines employment status under the relevant
employment legislation, for example the definitions of
“contract of employment”, “employee” and
“employer” vary from one employment enactment to
another.
Typical characteristics of an employee
The Code sets out a helpful list of characteristics typical of
an employee, while noting that not all of them may apply. These
include looking at whether the individuals concerned:
- Are under the control of another person who directs them as to
how, when and where the work is to be carried out - Supply labour only
- Receive a fixed hourly/weekly/monthly wage
- Cannot subcontract the work
- Do not supply materials for the job
- Do not provide equipment other than the small tools of the
trade - Are not exposed to personal financial risk in carrying out the
work - Do not assume any responsibility for investment and management
in the business - Do not have the opportunity to profit from sound management in
the scheduling of engagements or in the performance of tasks
arising from the engagements - Work set hours or a given number of hours per week or
month - Work for one person or for one business
- Receive expense payments to cover subsistence and/or travel
expenses - Are entitled to sick pay or extra pay for overtime.
Typical characteristics of self-employment
The Code also sets out a list of characteristics typical of an
individual who is self-employed, again noting that not all of them
may apply. These include whether the individuals concerned:
- Own their own business
- Are exposed to financial risk by having to bear the cost of
making good any faulty or substandard work carried out - Assume responsibility for the investment in and management of
their work activities - Have the opportunity to profit from sound management in the
scheduling and performance of engagements and tasks - Have control over what is done, how it is done, when and where
it is done and whether they, or another person, does the work - Are free to hire other people, on terms they specify, to do the
work which has been agreed to be undertaken - Can provide the same services to more than one person or
business at the same time - Provide the materials for the job
- Provide equipment and machinery necessary for the job, other
than the small tools of the trade or equipment which in an overall
context would not be an indicator of a person in business on their
own account - Have a fixed place of business where materials, equipment etc.
can be stored - Costs and agrees a price for the job
- Provide their own insurance cover e.g., public liability cover,
etc. - Control the hours of work in fulfilling the job
obligations.
Worked examples
Very helpfully, the Revenue Guidelines that support the Code
examines 19 case studies and applies the criteria and
characteristics of employment and self-employment to each case. A
conclusion is reached in each case as to whether, based on the
specific facts, the person is an employee or a contractor. These
worked examples will be very helpful to businesses trying to form
an assessment about workers engaged by them in the post
Karshan world.
Special Circumstances and developments in the labour
market
The Code outlines information on the PRSI classification of
people who own or control their own companies, agency workers,
intermediary arrangements such as personal service companies and
managed service companies, and workers in the digital/gig
economy.
False/Bogus self-employment
This term is used to describe when an individual, who is in fact
engaged under a contract of employment, is knowingly recorded and
reported to the Revenue Commissioners and the Department of Social
Protection as if they were operating under a self-employed
contract. This is a criminal offence which gives rise to a loss of
PRSI and income tax, and sanctions under the Social Welfare
Acts.
Conclusion
The Code certainly provides a helpful and practical guide for
organisations assessing the question of employment status. It is
important to ensure that individuals are correctly classified in a
way that matches the reality of the relationship between the
individual and the business.
Organisations should carefully review any existing contractual
or service arrangements they have in place with independent
contractors, by reference to the Code, and in conjunction with the
separate guidelines issued by Revenue in May 2024, to determine
whether there is any risk that they might be deemed to be employees
of the business. It is also important to keep any such arrangements
under review, as the relationship between businesses and
independent contractors can develop and change over time.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
