by Anne Lyne , Catherine Jane O'Rourke, Gráinne Carville April-08-2025 in Employment Law

 

OVERVIEW

Employment status is a tricky area of law in that a contractor relationship can be agreed between the parties but that doesn’t prevent the Workplace Relations Commission (the “WRC”), the Revenue Commissioners and/or the Department of Social Protection (the “DSP”) deciding that an employment relationship is more suitable. The consequences that may then flow from such a determination include the acquisition of employment rights by the worker and/or tax and social welfare becoming due.

The Code of Practice on Determining Employment Status (the “Code”) provides guidance to the parties for the making of such a determination. The Code was originally published in July 2021 by the WRC, the Revenue Commissioners and the DSP. The Code was updated in October 2024 to incorporate the 5-step framework set out by the Supreme Court in the landmark decision of the Revenue Commissioners-v-Karshan (Midlands) Ltd T/A Domino’s Pizza[1] (“Karshan”), that reformulated the legal tests for the determination of employment status of workers.

 

WHY IS THIS IMPORTANT?

Contractors, who are self-employed persons that work pursuant to a contract for services, are treated differently than employees, who are persons that work pursuant to a contract of service, in a number of ways:

  • PRSI – they are classed differently for PRSI purposes, and employers will also be responsible to pay employer PRSI.
  • Tax – an employee will have income tax, USC and PRSI deducted from their income through their employer’s payroll system, whereas a contractor is obliged under self-assessment to pay preliminary tax and file their own income tax returns using the Revenue Online System (ROS).
  • Legal protection – contractors are not protected to the same extent by statute, as employees are. For example, employees may have statutory legal entitlements to annual leave, rest breaks, notice of termination, redundancy payments etc. that contractors would not have.
  • Insurance - an employee will, generally, be covered by their employer’s public liability insurance, whereas a self-employed person is expected to hold their own insurance.

 

TYPICAL CHARACTERISTICS

Employee

The Code acknowledges that the definition of ‘employee’ may vary, depending on the relevant legislation. It provides helpful examples of characteristics that are typical of an employee, including:

  • An employee supplies labour only
  • An employee cannot subcontract the work
  • An employee does not supply materials for the job
  • An employee works for one person or for one business
  • An employee is not exposed to personal financial risk in carrying out the work

The Code provides certain caveats to these employee characteristics, making clear that no one characteristic will definitively determine the status of a worker, but rather all elements of the working relationship must be looked at holistically. 

Self-employed person

Examples of characteristics that are usual for those in self-employment are provided, which include:

  • A self-employed person owns their own business
  • A self-employed person is exposed to financial risk by having to bear the cost of making good any fault or substandard work carried out
  • A self-employed person has control over what is done, how it is done, when and where it is done and whether they, or another person, does the work
  • A self-employed person can provide the same services to more than one person or business at the same time
  • A self-employed person provides the materials for the job

The Code also provides caveats to these characteristics, including the fact that an individual has registered for Income Tax or VAT under the principles of self-assessment does not automatically mean that he or she is self-employed; and a person who is a self-employed contractor in one job is not necessarily self-employed in another job.

 

THE 5-STEP FRAMEWORK

The Supreme Court delivered the landmark decision, Karshan, on 20 October 2023. Karshan relates to the determination of the employment status of pizza delivery drivers for taxation purposes, and the Supreme Court found that, despite the contracts for services (contractor agreements) in place for the delivery drivers, they were employees for tax purposes due to the true nature of the working relationship. The Supreme Court in Karshan listed the following relevant factors to consider when ascertaining whether a worker is an employee or an independent contractor:

  1. Does the contract involve the exchange of wage or other remuneration for work?
  2. If so, is the agreement one pursuant to which the worker is agreeing to provide their own services, and not those of a third party, to the employer?
  3. If so, does the employer exercise sufficient control over the putative employee to render the agreement one that is capable of being an employment agreement?
  4. If these three requirements are met, the decision maker must then determine whether the terms of the contract between employer and worker interpreted in the light of the admissible factual matrix and having regard to the working arrangements between the parties as disclosed by the evidence, 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 employee working for themselves or for the putative employer.
  5. Finally, it should be determined whether there is anything in the particular legislative regime under consideration that requires the court to adjust or supplement any of the foregoing.

The Supreme Court indicated that factors 1, 2 and 3 act as a filter. If any filter question is answered in the negative, no contract of employment can exist.

 

WHAT HAS CHANGED?

None of the above factors are anything new in the assessment of a worker’s status. However, traditionally, mutuality of obligation would have been a key consideration in differentiating a contractor from an employee. Mutuality of obligation refers to the obligation on one party to provide work, and an obligation on the other party to carry out this work. The Supreme Court, however, moved away from this view, and indicated that the mutuality of obligation as a distinguishing factor has been over-emphasised in previous caselaw.

The Code now refers to the five criteria of Karshan, explaining that the five-step framework provides a clear decision-making model to determine the employment status of each worker. It is expressed, however, that the Code is a ‘living document’ that will “continue to be updated to reflect future, relevant changes in the labour market, relevant legislation and case law”.

 

WRC

Since its delivery, the WRC has regularly referred to Karshan.

In a 2024 decision, Matthew McGranaghan v MEPC Music Limited ADJ-00037668, the WRC addressed the five-step test detailed in Karshan. It determined that Mr McGranaghan, a fiddle player in a band, was an employee based on the totality of the relationship and the evidence presented, which included evidence that he had no control over his schedule, and that he could not substitute somebody else in his place. He was awarded approximately €44,000 in compensation.

 

REVENUE GUIDANCE

The Revenue Commissioners issued a Tax and Duty Manual in May 2024 with guidelines for determining employment status for taxation purposes. The guidelines also refer to the five factors from the Karshan decision.

 

CONSEQUENCES OF A DETERMINATION OF EMPLOYMENT STATUS

Section 9 of the Code details the consequences of a determination of employment status, which can include an effect on tax, USC or PRSI payable, entitlements to social welfare benefits, public liability or rights and entitlements under certain employment legislation.

The Code explains that there are a number of statutory bodies that may be required to determine the employment status of a person and that “Each of these bodies make their determinations independent of each other…” and that “Decisions of the Department of Social Protection, or the WRC or Revenue are not binding on each other”. It is clear that each body is not bound by another’s decisions in the determination of employment status. Technically, a worker could be found to have a different status by different bodies. The Code appears to state that the DSP may look through a Personal Services Company (PSC) for PRSI purposes, whereas the Revenue stated in their own Guidelines that they do not look through corporate structures, except in very limited circumstances.

The Code says, however, that it is “not intended to bring genuinely independent contractors into the employee category”, but that false or bogus self-employment may give rise to a criminal offence (where an organisation knowingly records and reports a worker who is, in fact, engaged under an employee contract of service to Revenue and to the DSP as if they were operating under a self-employed contract for services).

There still remains a strong element of uncertainty for parties that enter into contractor arrangements. On 28 March 2025, the Minister announced that the Employment Law Review Group would look at determination of employment status as part of its programme of work for 2025/2026.

 

KEY TAKEAWAYS

  • Working relationships should be examined in real and granular way by the relevant stakeholders to ascertain whether the relationship is an employment relationship or an engagement of a self-employed individual.
  • In carrying out this examination, the five criteria of Karshan and the Code should be referred to.
  • The Code is welcome guidance for employees, employers, self-employed workers and legal practitioners to assist in the assessment of a particular worker’s employment status.
  • Whilst it is important for parties to a contract to assess employment status and be able to demonstrate consideration, the decision ultimately rests with the relevant authorities who can look behind the contract i.e. the WRC/Courts, the Revenue Commissioners and the DSP.

 

 

[1] [2023] IESC 24

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About the Authors

Anne Lyne
Anne Lyne

Anne is a partner and leads the Employment Law team at Hayes solicitors advising on the full range of employment related issues.

Anne understands that if an employment related issue arises that responsiveness and practical assistance are key for clients. Anne and the team are available for clients to ensure that matters are addressed promptly.

 

Catherine Jane O'Rourke
Catherine Jane O'Rourke

Catherine advises both employers and employees, in relation to contentious and non-contentious employment matters, including contracts of employment, workplace policies, workplace investigations, statutory compliance, redundancies and dismissals. Catherine also has a background in transactional banking, including acquisition finance, property investment finance and development/construction finance.

Gráinne Carville
Gráinne Carville

Gráinne is a newly qualified solicitor in the Employment Law team at Hayes solicitors LLP. Since qualification, Gráinne has advised public and private clients in transactional, advisory and litigation contexts.