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 classified 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.

For more information or assistance, contact a member of our team.

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