When engaging contractors to provide services, the nature of the engagement should be considered in order to determine whether it is one of employment (employee) or self-employment (contractor).

A contractor is responsible for their own taxes and is required to pay their taxes under the self-assessment system and file their own tax returns. An employee on the other hand is subject to payroll withholding taxes operated by the employer and employers will be subject to PRSI.

A worker’s employment status is not a matter of choice. Anyone making payments to individuals needs to correctly determine whether individuals are employed or self-employed for tax purposes. The terms and conditions of a written service agreement cannot by themselves, be relied upon in determining employment status but rather the facts and circumstances of the engagement must also be considered.

On 20 October 2023, the Supreme Court delivered a significant judgment with respect to the determination of employment status in ‘The Revenue Commissioners v Karshan (Midlands) Ltd t/a Domino’s Pizza’. The case delivered a 5-step decision-making framework that should be used to determine employment status. The judgment applies to all forms of engagements whether continuous, once-off or gig based arrangements.

Revenue expect taxpayers to be able to provide an analysis of the application of the 5-step decision-making framework, when required, to demonstrate why it has been determined that a worker is not being treated as an employee for payroll withholding tax purposes. 

In the event an individual has been misclassified as a self-employed contractor rather than as an employee, Revenue may seek the repayment of uncollected payroll taxes and employer PRSI along with interest and penalties.

Given the significance of the recent Supreme Court judgment, Revenue have requested that businesses urgently and comprehensively review arrangements to determine employment status.

Complete the 5-step decision-making framework

Step 1
Does the contract involve the exchange of 'wage or other remuneration' for work?

Wage or other remuneration: There must be a wage or other consideration for an employment arrangement to exist. An ongoing or continuous commitment to provide work does not necessarily need to prevail.

Thus a contract is capable of being an employment engagement where there is a payment by the business to the individual either on a once-off or on-going basis and whether documented in writing or not.

Step 2
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?

Own services: For a contract of employment to exist the agreement must be one for personal service by the worker.

A limited degree of substitution is still consistent with a contract of employment, for example, where the worker is unable to carry out the work, or with the consent of another person who has absolute discretion to withhold consent. However, an unconditional right to appoint a substitute is inconsistent with a contract of employment.

Step 3
Does the employer exercise sufficient 'control' over the individual to render the agreement one that is capable of being an employment agreement?

Control: What is the level of control the business has over the individual worker in terms of how, when and where the work should be carried out along with what work should be carried out?

Control will also extend to considerations such as who controls elements of the engagement such as notice period, the method of undertaking the work, working hours and the amount of payment. Both the degree to which the individual is in business on their own account rather than carrying on the business of the engaging entity and the level to which the individual is integrated into the business should be considered.

 

Step 4
Having regard to the working arrangements between the parties as disclosed by evidence and the ‘factual matrix’ of the engagement, does the arrangement point to the individual working for the employer as opposed to themselves in their own business capacity?

Factual matrix: The facts and circumstances surrounding the relationship should be reviewed aside from the written agreement in place. The working arrangements between the parties should be interrogated in order to ascertain the true nature of the relationship.

After reviewing the factual matrix, it should be determined if the facts indicate that the individual is working for the business or providing services on their own account.

Step 5
Is there any “legislative” regime which may render the arrangement as not being one of employment for tax purposes?
Is there any “legislative” regime which may render the arrangement as not being one of employment for tax purposes?

Legislative: Finally, consideration needs to be given to any legislative provisions which may require an adjustment to the outcome from questions one to four such as schemes involving the protection of particular employee rights. 

Your answers indicate it may be likely that the individual should be treated as an employee* for tax purposes - contact Grant Thornton to understand what this means for you.

*The indicative outcome does not constitute tax advice and no reliance should be placed on the result delivered. The final position will be determined by the specific facts and circumstances of each situation. Please contact Grant Thornton for support in undertaking a review.

Your answers may indicate the individual is considered a contractor* for tax purposes - contact Grant Thornton to understand what this means for you.

*The indicative outcome does not constitute tax advice and no reliance should be placed on the result delivered. The final position will be determined by the specific facts and circumstances of each situation. Please contact Grant Thornton for support in undertaking a review.

Your answers may indicate the individual is considered a contractor* for tax purposes - contact Grant Thornton to understand what this means for you.

*The indicative outcome does not constitute tax advice and no reliance should be placed on the result delivered. The final position will be determined by the specific facts and circumstances of each situation. Please contact Grant Thornton for support in undertaking a review.

For more information on employer solutions, contact our experts

Jane Quirke
Jane Quirke
Director - Tax
Galway
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Michelle Dunne
Michelle Dunne
Director - Employer Solutions
Dublin
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