Evolving guidance

Revenue published updated Guidelines reflecting the 5-step test in May 2024 with the addition of commentary on how it should be applied (the “Guidelines”). The Guidelines referred to the development of a new Code of Practice on Determining Employment Status (“the Code”) by an interdepartmental group consisting of Revenue Commissioners (“Revenue”), the Department of Social Protection (“DSP”) and the Workplace Relations Commission (“WRC”). Employers were directed to “urgently and comprehensively review arrangements” with all “contractors” to assess employment status for taxation purposes.

The Code followed in late 2024 with the aim of offering the public, as well as the decisionmakers in the DSP, Revenue and WRC a clear understanding on the employment status of individuals. Our earlier summary of the Code is available for reading here. According to the Code, the DSP (deviating from Revenue’s approach), proposed applying the 5-step test to individuals, notwithstanding that they may be engaged via a Personal Service Companies (“PSC”) and Managed Service Companies (“MSC”). This involves looking behind the corporate vehicle through which the agreement is made where it determines that the PSC/MSC is simply a vehicle through which a contract of service is arranged. Where the DSP determines that a worker is incorrectly classified for PRSI purposes, the employer will be required to pay the employee PRSI contributions for the “contractor” for the period of the agreement, with no limit on the “look back” period. 

Implications for employment rights litigation

The Karshan case centred around taxation and the judgement specifically stated that this decision was largely confined to its own facts. Nevertheless, the findings have quietly crept into the employment rights sphere with a slow but steady uptake in WRC claims, manifesting (so far) in claims for unfair dismissal, payment of wages and breaches of organisation of working time legislation. 

Two of the earliest cases (Lauren McBride -v- FSR Atlantic Limited t/a ADHD Now (“McBride”) and Matthew McGranaghan -v- MEP Music Limited (“MEP”)) saw WRC Adjudication Officers consider the employment status for both workers before determining the substantive complaints before them. Both were generally accepted as somewhat unusual cases that could be confined to the facts at hand.

Recently, however, a more “traditional” employment rights/status case came before the WRC for adjudication, with the decision offering more insight into the WRC’s attitude towards employment status disputes and perhaps reaffirming a willingness to look behind contractual arrangements as was seen in McBride and MEP.

Paul Lingard -v- Randridge International Ltd (In Examinership) (“Randridge”) 

The Randridge case centred around an application for non-payment of wages and the meaning of “employee” for the purpose of the Payment of Wages Act,1991 (the “Act”). The contractor (a Construction/Civil Works Manager) was providing services pursuant to a written agreement to the Respondent (a Consulting Civil Engineering company) via PSL (Aberdeen) Ltd (“PSL”) at an agreed monthly rate.

The contractor acknowledged that he was not an “employee” as commonly understood. The relationship was uneventful for 4 years. However, following outstanding unpaid payments in late April 2024, the contractor reconsidered the nature of his relationship and issued his payment of wages claim. The WRC held that “His relationship, in all matters, save his Personal Tax filings, had been effectively identical to that of a directly employed employee”.

Analysis of complex issues

The Adjudicator also considered the 5-step test set out in Karshan. Noting the Supreme Court’s observation that “Where the agreement seeks to characterise the status of the parties, that description does not prevent the Court from determining what, as a matter of law the agreement actually is”. The Adjudicator called out that “…evidence on the ground of the actual “day to day” working relationships is crucial”.

In particular, the Adjudicator had regard to the following points, which can be grouped in support of contract of/contract for service:

In considering the foregoing, the Adjudicator held that, on the balance of probabilities, the relationship between the parties was that of employee/employer (a contract of service), i.e the contractor was an employee.

How does this affect my business?

The consequences of improper classification of a contractor are far-reaching, and range from outstanding taxes, penalties and interest, to employment rights claims by an alleged employee. However, somewhat surprisingly, it is not uncommon for companies to brush this aside, very often stating that the individual (the contractor) requested the specific arrangement. This approach is not without risk, and it would be sensible to bear in mind that:

• The Karshan judgement gave Revenue greater scope to challenge long-standing arrangements and norms in certain industries like IT, Construction, Media and Financial Services. Following a period of (Revenue encouraged) self-review of existing contractor relationships, Revenue can and is conducting audits in this space.
   
  
• If relationships sour, as so often happens, and with an increase in positive results for contractor claimants, disgruntled “contractors” will be more likely to litigate and challenge arrangements put in place.
   
  
• The EU Platform Directive (due to be implemented by December 2026) introduces a presumption that, in certain circumstances, gig/platform workers are in fact employees as opposed to independent contractors, meaning that this is a topic likely to come into even sharper focus in the coming months.

What have we learned to date?

Organisations can take two important lessons from the Randridge decision:

• Attitudes are changing across the board, from the WRC, Revenue, the DSP and the individual “contractors” themselves. These relationships are now being heavily scrutinised and assessed. 
   
  
• Most importantly – the terms of any contractor agreements are key. When in dispute, they are being studied and analysed more closely than ever before. Many provisions that companies and contractors would, in the past, have taken a commercial view/risk and chose to include in a service agreement (such as control around hours, outside work, restraints, reimbursements, etc). However, it is clear now that this approach will weaken any argument in favour of a true contractor relationship.

While in some ways, it is becoming more difficult to correctly and adequately negotiate a contractor agreement (in such a way as to protect your business), it is not impossible. For those with existing arrangements in place, a proactive review of the terms and conditions agreed between would be a sensible move, with corrective action being required where existing terms suggest that an employment relationship exists.

This article was provided by:

Aoife Gallagher-Watson

EY Law Ireland
Harcourt Street, Dublin 2, Ireland
Office: 01-4750555  
Email: Aoife.Gallagher-Watson@ie.ey.com 
Website: www.ey.com