Following from the recent Supreme Court ruling in the case of The Revenue Commissioners v. Karshan (Midlands) Ltd t/a Dominio’s Pizza (the “Karshan Decision”), Revenue have recently published its “Guidelines for Determining Employment Status for Taxation Purposes”.
While Revenue has responsibility for determination of employment status of a worker for taxation purposes, responsibility for determination of employment status of a worker for PRSI purposes falls to the Department of Social Protection.
There is a legal difference between a contract of employment (known as a ‘contract of service’) and a ‘contract for service’. A contract of employment applies to an employee-employer relationship. A contract for service applies in the case of an independent, or self-employed, contractor.
The Guidelines reflects the five-step framework to be followed in determining an individual’s employment status, as established by the Supreme Court in the Karshan Decision. The five-step framework is –
- Does the contract involve the exchange of a wage or other remuneration for the work provided? Commonly known as a “Work/Wage bargain”
- 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? This is described as “Personal Service” in the Guidelines
- 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?
- 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 evidence, are consistent with a contract of employment, or with some other form of contract, in particular, to whether the arrangements point to the Putative employee working for themselves or for the putative employer.
- Finally, it should be determined whether there is anything in the particular circumstances legislative regime under consideration that requires the court to adjust or supplement any of the foregoing.
The first 3 questions of the framework are to operate as a filter and if any of these questions are answered in the negative, then there can be no contract of employment. However, where the response to the first 3 questions are answered in the affirmative, the questions 4 and 5 of the framework are to be considered.
The Guidelines have expanded on the five elements of the framework over 30 pages, with extensive quotes from the Karshan Decision. It provides full explanation of the five-steps with 19 examples of the application of the framework.
The Guidelines have specifically referred to certain industries which, following the application of the five-step framework, Revenue consider it likely that there would be a number of employees who are currently categorized as contractors. These industries are construction, domestic setting; couriers and other transport providers, media and platform operators along with details on part-time, casual and seasonal workers and the public sector.
While there is specific reference to these industries, all workers are still subject to the five-set framework before being determined to be an employee.
It is detailed in the Guidelines clearly states that any “engagement of companies by business cannot be contracts of service, or employment, for taxation purposes”.
As stipulated at the time of publishing its findings on the Karshan Decision, the Supreme court clarified the decision was not to determine if the drivers held continuous service per employment legislation and noted that it is a tax case.
It is critical for Employers to prioritize accurately classifying workers due to the significant overlap in tests used by Revenue and other adjudicating bodies such as WRC to determine employment status. Misclassifying a contractor can result in substantial risks, including potential tax liabilities, social welfare liabilities and employment law claims.
Employers must be aware that Revenue expects them to
- Retain evidence that they have carried out an analysis when engaging contractors applying the five-step framework, particularly when determining that they are properly contractors, and also
- Regularly review the contractor engagement to ensure that the application of the five-step framework has not changed over time as the relationship evolves.
- Revenue also expects all employers to do this review on existing contractors who were engaged before the Karshan Decision.
Revenue Guideline – https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-05/05-01-30.pdf
For further information or support on this or any HR matter, ISME Members can contact the HR Advice Line via HR@ISME.ie or 01 6622755.
