Determining the Employment Status of Workers for Tax Purposes

legal person working on documents

by Kady O’ Connell, Partner, Employment Law & Benefits Team at Mason Hayes & Curran LLP

The Revenue Commissioners (Revenue) recently issued a Tax and Duty Manual entitled Guidelines for Determining Employment Status for Taxation Purposes (the Guidelines). The Guidelines are available online. They set out the tax implications of the Supreme Court’s decision in The Revenue Commissioners v Karshan (Midlands) Ltd. t/a Domino’s Pizza. In that decision, it was held that delivery drivers of Domino’s Pizza should be treated as employees and not independent contractors.

The Guidelines offer guidance on determining employment status for tax purposes in light of Karshan. Although the Guidelines are not concerned with the employment law implications of the Supreme Court’s judgment, they are very relevant for employers in the context of determining employment status generally.

The Guidelines also include 19 practical examples which will assist employers in determining what Karshan means for the taxation of workers they engage.

The five-stage framework

The Guidelines set out a five-step “decision-making framework” which is derived from Karshan. The Framework enables employers to identify whether a worker is an employee, i.e. engaged under a contract of service, or self-employed, i.e. engaged under a contact for service. The Framework consists of five questions, as follows:

1. Is there a work / wage bargain?

There must be an exchange of work for remuneration before a working arrangement can be categorised as a contract for service. This is a more “straightforward analysis” or reframing of the mutuality of obligation test. The Supreme Court stated that this has caused “unnecessary confusion” in the past. If there is no work / wage bargain, there is no contract for or of service.

2. Is there an agreement to provide personal services with limited substitution?

The more restrictions imposed on the freedom of a worker to appoint a substitute, the more this points towards the existence of a contract of service. If the answer to this question is no, the contract is likely a contract for service.

3. Does the employer “control” the worker?

This refers to the ability, authority or right of an employer to exercise control over a worker concerning what work should be done, and how, when and where it should be done. An assessment of the level of control may involve a consideration of the “enterprise test”, i.e. which party “bore the economic risk”, and the “integration test”, i.e. the “extent to which a worker, and their work, form a coherent part of the business”. If the answer to this question is no, the contract is likely a contract for service.

4. Does the factual matrix point to a contract of service?

This involves an examination of the “complete factual matrix” to establish if the working arrangement is consistent with a contract of service or whether the individual is self-employed. While a detailed written contract may carry “significant weight”, it is not determinative. Any attempt to circumvent or frustrate the operation of statutory provisions will be challenged by Revenue. If the answer to this question is no, the contract is likely a contract for service.

5. Is there any legislative regime saying this is not a contract of service?

Consideration must be given to any legislation that requires an adjustment or supplement to questions 1 – 4 in the circumstances of the relationship being considered, e.g. where legislative provisions carry a different meaning.

Takeaways for employers

  • Employers must ensure that the correct taxes are deducted from employees’ pay and reported through the PAYE system. An employer that has not already self-reviewed their work force model in light of Karshan should carefully review the Guidelines and do so now. It is worth noting that Revenue anticipates an increase in the number of workers that will be determined as employees for tax purposes once the Framework is applied to their facts and circumstances.
  • The Karshan decision relates solely to the tax treatment of individuals. However, it is of critical importance to employers given the overlap in the tests used by Revenue and also bodies adjudicating on employment rights, for example the WRC and civil courts, in determining worker status. Where a contractor is misclassified, this gives rise to considerable risks. This includes potential tax /social welfare liabilities and/or employment law claims.
  • Revenue’s view of the tax treatment of services supplied through a Personal Services Company or a Managed Services Company has not changed on account of Karshan. Revenue will not look behind corporate structures except in very limited circumstances specifically provided for in the Taxes Consolidation Act 1997.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

About the author
Kady O’ Connell is a Partner on the Employment & Benefits Team at Mason Hayes & Curran. Her focus practice areas include both contentious and non-contentious employment law.
Kady regularly advises on day-to-day issues arising from the employment relationship. This includes the preparation and review of employment contracts and workplace policies, and advising on disciplinary investigations and dismissals. She also has particular experience in advising national and international companies on redundancy matters and exit strategy.