It has become quite common in Ireland for businesses to treat workers as self-employed for tax purposes. However, Revenue is currently focused on addressing this gap and ensuring better compliance, which means that misclassifying workers could cost you both fines and penalties. It’s time for organisations to review their arrangements with workers and determine their employment status for taxation purposes. Let’s explore why.
Contractor versus employee: what has changed?
The law itself has not been changed here. However, a Supreme Court judgment in October 2023 – ‘The Revenue Commissioners v Karshan (Midlands) Ltd. t/a Domino’s Pizza’ – has prompted Revenue to issue new, detailed guidelines to help businesses understand what criteria are used to distinguish between an independent contractor (a sole trader) and an employee. This includes factors such as the level of control exercised by the employer, the integration of the worker into the business, and the financial risk borne by the worker.
The aim is to ensure that companies (including not-for-profit entities such as sporting organisations and charities) correctly classify workers to comply with tax, social insurance, and employment law obligations. The expected outcome is that many more self-employed people will come within the scope of PAYE, PRSI, and USC. It is part of a broader effort to ensure fair working conditions as well as proper tax compliance.
Understand contractor classification
The past few decades have definitely seen an increase in de facto employees being hired as contractors. Employers might use this approach to reduce their liabilities related to sickness pay, leave, redundancy payments, and other benefits. By classifying workers as contractors, companies can scale their workforce up or down to suit business needs without being locked into long-term commitments. This practice also allows employers to skirt obligations stipulated in various employment legislations.
The Domino’s Pizza case, which Revenue won, means that they will now be much tougher on some of the distinctions companies have made in the past. Previously, we might have used quite simple criteria to establish that a worker was not an employee, such as using their own computer or equipment, the fact that they had other clients, or that they only worked on specific projects. However, companies should now use Revenue’s decision-making framework, available in the document Revenue Guidelines for Determining Employment Status for Taxation Purposes.
This is a significant, far-reaching shift in thinking. Simply working for a number of customers no longer entitles someone to operate as self-employed. And any job that could be carried out by an employee is potentially subject to such classification – one example being camera operators, sound technicians, editors, etc., in the TV and film industries who historically may have done the same role for many years while being classified as self-employed contractors.
Revenue’s new decision-making framework
The framework consists of five questions. The first three questions are a filter; if any of these are answered negatively, there cannot be a contract of employment. If the first three questions are answered affirmatively, questions four and five must then be considered to determine if a contract of employment exists.
- Question 1. Does the agreement involve the exchange of a wage or other remuneration for specific tasks or services? This is commonly known as the ‘work/wage bargain’ and does not cover casual or domestic arrangements (for example, paying expenses to a volunteer or having a neighbour babysit your children).
- Question 2. If so, is the worker agreeing to provide their own services, rather than those of an unnamed third party, to the employer? This is commonly known as ‘personal service’, because the worker must perform the work personally and cannot delegate tasks to someone else. If personal service is required, it suggests an employment relationship rather than an independent contractor relationship.
- Question 3. If so, does the employer exercise sufficient control over the employee to render the agreement one that is capable of being an employment agreement? This would be where an employer decides how, when, and where the work is performed, supervises the employee’s activities, provides guidance on tasks, and evaluates their performance.
- Question 4. If the first three requirements are met, the terms of the contract between the employer and worker suggest an employment relationship. The focus now is on assessing whether these arrangements indicate the worker operates independently or primarily works under the direction and integration of the employer. This analysis helps ensure that the classification of the relationship accurately reflects its legal nature, considering all relevant aspects of the employment engagement.
- Question 5. This focuses on the legislative context surrounding the employment relationship being considered. It stresses the importance of examining any relevant legislation that may impact the interpretation of the preceding questions, including whether specific laws or directives (such as those protecting employee rights or regulating digital platform workers) necessitate adjustments to the analysis. Such legislative frameworks may introduce legal presumptions or burdens of proof that influence how employment status is determined in practice, ensuring fair treatment and clarity in employment arrangements.
This is a simplified overview of the framework. The guidelines PDF contains more detailed information and has example scenarios to demonstrate how an employer can evaluate their relationships with workers.
What should employers do next?
So, what must be done if you examine your agreements with contractors and find that they would in fact be employees based on the relationship? Firstly, you must act in a timely manner. Do not ignore this issue, because if you are inspected in a few years’ time you could be looking at significant liabilities – at least 11% (i.e., the PRSI) of everything you’ve paid to contractors in the intervening period, potentially with interest and/or fines.
If you need to regularise the situation with your workers, you can reclassify them as employees and put them on the payroll. However, this won’t suit all contractors as they will lose the benefits of being sole traders, such as being able to deduct expenses. Contractors with several clients and/or significant expenses will find it more advantageous to incorporate. Your business can then start a new relationship with the limited company formed by your contractor.
For anyone serious about their contractor status, a limited company makes a lot of sense. It is a tax-efficient way to manage income and expenses, the liability is limited, it conveys a level of professionalism, and there is potential for growth. I imagine that it will be the preferred option for a lot of sole traders, as the compliance costs associated with running a limited company are easily outweighed by the benefits.
In the UK, HM Revenue & Customs (HMRC) has been closely scrutinising single member, single employee limited companies. The concern is that these arrangements may be used to disguise employment, thereby reducing the tax revenues collected by HMRC and undermining the fairness of the tax system. There is, however, no indication that the same thing could happen in Ireland in the near future.
Seek advice about your worker classifications
At Beyond, we have already looked at our relationships with contractors and will have them regularised before the end of the year. I recommend you take stock within your own organisation in the coming months, too. Look at your contractors and decide if you are exposed. If you are, make a change. If your situation is complex or you have real uncertainty around this, some time with a tax expert is probably a good idea. We can provide a consultation service to discuss your unique situation and receive written advice around it.
