Categorisation of Employee v Independent Contractor I
The distinction between employees and independent contractors is of great practical importance. However, it may be difficult in some cases to draw the line between a contract of employment and self-employment. The terms of the written contract between the parties is a consideration, but is not determinative.
The issue of whether a person is an employee or an independent contractor commonly arises in the context of the obligation to deduct social insurance payments and income tax under the PAYE system. Social welfare, tax and employment law categorise persons as employees or independent contractors and treats the person in each category in significantly different ways.
The distinction is critical in relation to the obligations of employers. It is also critical to the entitlement to employee rights, most of which require a contract of employment.
Categorisation of Employee v Independent Contractor II
There may be an initial advantage for both parties in seeking to treat a service arrangement as that of an independent contractor providing services, rather than employment. However a mutually agreed designation of the status does not determine the position. The law looks at the substance and reality of the position.
If an employer wrongly categorises a person as an independent contractor or agrees to an arrangement at the employee’s behest to treat him as such, then he may be subject to significant liabilities if it is later decided by the tax, other authorities or the court that he is “really” an employee and not independent contractor. .
Consequences of Difference
Payments may usually be made to an independent contractor without deduction of tax. In contrast, an employer must deduct tax and levies and pay employer’s levies for his employee under the PAYE system. If the arrangement is “really” one of employment, the employee will be obliged to pay all arrears of income tax, levies, contributions and well as interest and penalties to the Revenue Commissioners. Although the employer may have a right to recover the tax and levies paid on his behalf of the employees, he may not be able to do so, and his obligation to pay the Revenue will remain.
An independent contractor has minimal statutory rights. His service may be terminated, subject only to compliance with the terms of any contract that may be in place. In contrast, an employee enjoys a wide range of statutory rights. This includes the rights not to be unfairly dismissed, rights to redundancy payments, minimum notice, holidays, anti-discrimination, union membership and many others. If an independent contractor is re-categorised as an employee, then the relevant rights may be invoked.
Traditional Test of Employee
In most cases, it will be clear whether the relationship is that of an employee or independent contractor. However, the criteria for determining whether somebody is an employee or independent contract can be difficult to apply in marginal cases.
In a borderline case, the question as to whether an individual is an employee or independent contractor may only be ultimately decided in some formal body such as the Revenue, an employment tribunal or by the Courts in the event of a dispute.
The traditional test for employment was whether the employee was under the control of the employer. It was said that if a person could be told both what work was to be done and how it was to be done, then there was employment. In contrast, the independent contractor was said to be obliged to achieve a result but had freedom as to how to do so.
Another traditional hallmark of an independent contractor was that he used his old tools. The ability to use his own contractors and employees was and remains wholly inconsistent with an employment arrangement.
The degree of integration of a person as part of the organisation was formerly a highly significant factor. As in the case of control, it remains one of a number of factors, which is taken into account but is not determinative.
Key Modern Tests I
In modern times, the criteria for determining employment have been broadened. Control is still important, but not definitive. Generally, an employee can be instructed as to which tasks to perform and how to perform them. There may be different degrees of control. Many employees now have a high degree of independence and control in the way in which they execute their employment obligations.
There is no single factor but a variety of criteria are taken into account. There are a number of key tests to determine whether somebody is or is not an employee. However, It is not a question of running a checklist, but of viewing the overall situation from an objective perspective.
An employee is generally obliged to carry out the work personally. In contrast, an independent contractor may be able to substitute someone else to do the work.
The receipt of employee benefits is a significant factor. If the person is afforded holidays, a pension and sick pay, then this is indicative of employment.
Key Modern Tests II
Arguably, the single predominant modern consideration is whether the person concerned is in business on his own account. An independent contractor is in business on his own account and bears the financial risks (and rewards) from his own sound management of the task. The economic reality is a critical factor. The test although important is not decisive.
The Courts and other bodies undertake a composite test, taking all of the above factors into account. The level of independence is critical. Having a final say in how the business is run, risking one’s own money, providing his own equipment and the ability to substitute, are key indicators of a contract for services i.e. the person is an independent contractor.
Significance of Label
What is said in the contract of employment is important, but is far from conclusive. If the relationship has the characteristics of employment, then labelling it otherwise will be ineffective. The courts look at the reality of the relationship, regardless of how the parties describe it themselves. The employment contract may be determinative where the status is unclear or in a borderline case.
There may be a distinction between how the relationship is described in the contract and the practical reality of how it is implemented. If the reality of the relationship is different in substance to the label, then the substance of the position will take precedence. If the actual arrangements as they operate in practice has the characteristics of a contract of employment, it will be so treated, notwithstanding the label.
The courts will look at whether it was ever intended that the essential terms of a written contract would be carried into effect. They will consider whether the contract represents the true intentions or expectations of the parties, both at its commencement and as time goes by. If the arrangement comes to have the characteristics of employment, it is likely to be so classified.
Revenue Commissioners’ Code I
The Revenue Commissioners have published a Code of Practice which set out the criteria for employment, as distinct from self-employment. The Code reflects modern case law and their approach to the issue.
Under the Code, an individual is normally an employee if he meets all or most of the following criteria;
- if he is under the control of another who directs how, when and where he should work;
- supplies labour only;
- receives a fixed hourly, weekly or monthly wage;
- cannot subcontract work;
- does not supply materials for the job;
- does not provide equipment, other than small tools of the trade;
- is not exposed to financial risk;
- does not assume responsibility for investment and management in the business;
- does not have the opportunity to profit from sound management;
- works fixed hours or certain hours a week;
- receives expense, payments to cover subsistence; and
- is entitled to extra time off for overtime.
Revenue Commissioners’ Code II
The fact is a person may have a significant degree of freedom, does not preclude him being an employee. A person with specialist or professional knowledge may not be subject to direction, as to how the work is to be carried out.
A person may be an employee notwithstanding that he is paid by share, piece work or in some other non-standard fashion. A person may be an employee, notwithstanding that he does not work on the employer’s premises.
The criteria for self-employment include whether
- the person is exposed to financial risk by having to bear the cost of doing sub-standardr work;
- he assumes responsibility for investment and management;
- he profits from sound management;
- whether he has to work peronally or if the can be subcontracted or delegated;
- the person may choose his hours,
- he has control over what is done, how it is to be done, and where it is to be done;
- he is free to hire other persons to do the work;
- he can provide the same services to several persons, at the same time;
- he provides materials, equipment and machinery necessary for the job, other than small tools of the trade;
- he has a fixed place of business;
- he agrees on a price for the job;
- he provides his own insurance cover;
- the arrangement is in substance in the nature of any independent contractor.
The ability to subcontract or assign the tasks to someone else was and remains inconsistent with the status of employee.
Revenue Commissioners’ Code III
A person who has or professes knowledge, skill and experience in an area may provide consultancy services. He will typically charge fees for a particular job. He may be obliged to undertake obligations and assume responsibility for the services provided. Generally, either party may terminate the arrangements on notice. Further factors include whether the individual is registered for self-assessed, self-employment income tax and VAT.
Under the provisions of Section 16 of the Social Welfare and Pensions (Miscellaneous Provisions) Act 2013 proprietary directors who own or control 50% or more of the shareholding of the company, either directly or indirectly, cannot be an employee of that company. In these circumstances the individual is classified as self-employed for tax purposes and is liable to pay PRSI at Class S.
The classification of proprietary directors who own or control less than 50% of the shareholding of the company is determined on a case by case basis, taking into consideration the Code of Practice for Determining the Employment or Self-employment Status of Individuals.
- Categorisation of Employee v Independent Contractor I
- Categorisation of Employee v Independent Contractor II
- Consequences of Difference
- Traditional Test of Employee
- Key Modern Tests I
- Key Modern Tests II
- Significance of Label
- Revenue Commissioners’ Code I
- Revenue Commissioners’ Code II
- Revenue Commissioners’ Code III