In this month's First Tuesday Q&A, Joe Mahon, Associate in A&L Goodbody's Employment Practice Group, provides an overview of how the law distinguishes employees from independent contractors, including a summary of recent case law in this area. 

Introduction

The use of independent contractors can be commercially advantageous for both businesses and individuals. For businesses, engaging contractors can provide much-needed independent input on bespoke projects requiring expertise that cannot normally be sourced from its employees. For contractors, the independence of their engagement affords them a degree of entrepreneurship that is not normally associated with taking up employment with one business.

That being said, there are circumstances where the purported use of contractors does not reflect the reality of the relationship between the business and the individual, which can eventually lead to disputes, particularly where the relationship comes to an end on less than amicable terms. In such circumstances, the courts have developed a series of legal principles to determine employment status to protect de facto employees from being denied the statutory protections exclusively reserved for those with employment status.

Why is the distinction between employees and independent contractors important?

Whether or not an individual is deemed to be an employee or a contractor can have significant consequences for the engaging business. The risks associated with deemed employment status come in two forms.

First, there is the employment law risk. If a contractor's engagement with a company is terminated by that company in accordance with the termination provisions of the agreement, there may still be a risk that the contractor may assert employment status and seek to bring statutory employment claims at the Workplace Relations Commission. Most notably, this could include a claim for unfair dismissal. Typically, terminations of contractors will be done without any form of fair procedures or without recourse to the company's HR policies (e.g. the disciplinary procedures), which can make defending an unfair dismissal case very challenging if the individual can assert employment status.

Secondly, where a contractor is deemed to actually be an employee, there may be very serious tax-related consequences for the engaging company. Under Irish law, employers are legally required to collect employment taxes and other statutory deductions at source and remit them to Revenue on behalf of employees. In contrast, under a contractor relationship, payment is typically done by way of invoices issued by the contractor to the company, with the contractor taking care of their own tax affairs personally. Where Revenue make a determination that a purported contractor is actually an employee, this may result in a liability accruing to Revenue in respect of employment deductions that ought to have been paid to Revenue in respect of the preceding four years, including penalties and interest.

Can the parties avoid risk by expressly stating that the individual is an independent contractor?

Yes and no. It is very common and advisable for independent contractor agreements to expressly state that the parties agree that no relationship of employment shall arise between the parties. However, while this would certainly form part of the overall consideration of any subsequent employment status claim, it is very important to note that it is not at all determinative. In many of the seminal employment status cases before the courts, the contract between the parties would have usually contained this express wording. However, the courts have not been shy about disregarding the choice of wording in the agreement where the rest of the evidence suggests an employment relationship.

What is the legal test of employment status?

A more accurate question is 'what are the legal tests of employment status', as there are multiple tests applied by the courts in conjunction with each other. In addition, the Department of Social Protection has issued a Code of Practice on Determining Employment Status, which largely reflects the tests applied by the courts. What makes cases such as these so challenging, even for experienced lawyers, is that they are often hugely depending on the facts and can be difficult to predict with any great accuracy. In brief summary, the courts apply a combination of the following tests:

• Mutuality of obligation: This involves asking whether the individual is required to perform work for the company, and whether the company is reciprocally required to provide work for the individual. Typically under a legitimate contractor arrangement, the obligations between the parties are more ad hoc without major commitment. Contractors may have work to do some days, but not necessarily all of the time. Another associated question in this regard is whether the individual is required to do the work themselves, or if they may delegate to another person (e.g. a fellow contractor), the latter being more indicative of a contractor relationship.
• Control: A core tenet of the employer/employee relationship is that of master/servant. This invokes concepts of control, whereby the employer has supervisory control over what work is performed and how the work is performed. In contrast, a contractor should typically not be subject to the same control of their engaging company. While there will inevitably have to be some control (i.e. to allow the company to tell the contractor what they need to do), they should not have a reporting line to management of the company and should not be subject to the same performance management infrastructure as employees.
• Entrepreneurship: As mentioned at the outset, the core incentive for a contractor to engage in business on their own account is the pursuit of economic profit. Therefore, the courts will often consider whether the contractor stands to gain or lose commercially from the relationship. This may include questions such as whether the contractor can earn more by working more hours or whether the income from the company is more steady and guaranteed. In the case of the latter, there is a risk that the courts may see no commercial merit to the arrangement. Likewise, the negotiation of the contractor's fee can be indicative of whether the relationship is genuinely that of a contractor. Where the fee and terms of engagement are negotiated authentically (i.e. as opposed to paying a fee similar to a comparable employee's salary), it supports the idea that the contractor relationship is legitimate.
• Integration: A more holistic test applied by the courts is to consider whether the contractor has, through their engagement, been integrated into the organisation of the business. Instead of weighing up theoretical ideas about what the contractor's remit should be, this looks at the reality of the situation to determine if the contractor is effectively working in a way that is indistinguishable from a comparable employee. This could involve considering whether the contractor performs a materially similar role to other employee colleagues, whether are considered in practice to be part of a team and whether the contractor has access to benefits usually reserved to employees (e.g. parking, subsidised canteen, tax-saver tickets, etc.).

What can businesses using contractors do to mitigate against employment risk?

While it is not usually possible to entirely eliminate deemed employment risk, there are a number of steps businesses can take to mitigate against such risks. The most obvious step would be to only use contractors where appropriate and necessary. There needs to be an underlying and demonstrable reason for engaging someone as a contractor versus hiring them outright as an employee. While cost may be important here, more important would be only using contractors where temporary and sporadic work is needed to resolve an issue in the business. Ultimately, it will be important to stand over the engagement by pointing to the fact that the services provided by the contractor were not something that could normally be sourced internally through employees (e.g. installing a new IT system requiring independent input).

Another priority should be only engaging contractors through limited liability companies, and not directly with the contractor themselves personally. While it is still theoretically possible for employment status to be established in the presence of a limited liability company, it adds a much-needed degree of separation between the individual and the engaging business. In a recent Labour Court ruling (Associated Newspapers Ireland v Joseph Dunne – UD/21/15), the Labour Court indicated that the presence of a personal services company in the arrangement undermined the individual's assertion of employment status.

There are also a number of relatively minor, but still important steps that businesses can take to mitigate the risk further. This can include limiting the equipment and IT access of contractors to those only necessary for their work, issuing different and distinct email addresses / email signatures, and even treating contractors differently to employees in terms of facility use and perks.

Lastly, and most importantly, the agreement should be carefully drafted to include a number of important clauses and protections for the business. This includes clauses expressly confirming that no relationship of employment shall exist between the parties, as well as clauses requiring the contractor to obtain their own insurance policies and clauses allowing for the contractor to substitute in someone else to perform the work where they themselves cannot get it done. However, most important of all is the inclusion of a comprehensive indemnity which would require the contractor to foot the bill of any liability and cost associate with any claims of employment status or any tax liabilities arising from the engagement.

Have there been any recent cases on this topic?

Cases on employment status of contractors tend to arise relatively infrequently, and often turn on their own individual facts. That being said, there have recently been some informative cases in this area, as well as some interesting developments on the horizon. Most notably, the Supreme Court is currently considering an appeal by Revenue in respect of the status of pizza delivery drivers. In that case (Karshan v Revenue Commissioners – [2022] IECA 124), Revenue decided that drivers engaged by Domino's Pizza were in fact employees. Domino's Pizza issued judicial review proceedings  and were originally unsuccessful in the High Court, which upheld Revenue's decision. However, the Court of Appeal overturned the High Court ruling, stating that the High Court applied the law in this area incorrectly. Given the prominence of the so-called 'gig economy', it will most certainly be a case to watch.

As mentioned before, in Associated Newspapers Ireland v Joseph Dunne – UD/21/15, the Labour Court rejected an appeal by a contractor who failed to argue that he was in fact an employee of the respondent media company. While much of the Court's ruling comprised the application of the long-established tests of employment status, of note was the weight placed by the Court on the use of a limited liability company by the contractor, which the Court ruled undermined his claim to employment status. While this by no means indicates that the use of a services company is a fail-proof method to avoid employment risk, businesses would be wise to only engaging contractors through corporate entities as a matter of practice to minimise risk.