Reminder of the test set out in the Karshan Decision

The Karshan Decision determined that, the pizza delivery drivers in this particular case, were properly categorised by Revenue as employees and not independent contractors as argued by the Pizza company. Significantly, the Supreme Court determined there was no requirement for a 'mutuality of obligation' on an ongoing basis in order for an individual to be deemed an employee. 

Having disregarded the requirement for a mutuality of obligations the Supreme Court helpfully introduced a five-step test which is to be used in determining whether an employment relationship exists. The first three steps act as filter for the latter two steps:

• Does the contract involve the exchange of wage of other remuneration?
• Has the worker agreed to provide their services to the employer personally?
• Is the worker under the control of the business. 
  

If the three steps above are satisfied, the Court will then look at:

• All the circumstances of the employment.
• The legislative context:

Since the Karshan Decision, in October 2023 we have now a greater understanding as to how the Karshan Decision and in particular the five-step test is being applied in practice by the Revenue Commissioners, the Department of Social Protection and the Workplace Relations Commission.

The Revenue Guidelines for Determining Employment Status for Taxation Purposes May 2024 (the "Revenue Guidelines")

The five-step test has been incorporated into the Revenue Guidelines as a "decision making framework" in determining the employment status of a worker for taxation purposes.

Key provisions of those guidelines are:

• The Revenue Guidelines make it clear that the onus is on the businesses to ensure that the contractors they engage have been characterised correctly. Following the Karshan Decision businesses have a positive obligation to ensure that their contractors cannot be considered employees for tax purposes. 
  
• The Revenue Guidelines state that a worker's employment status is not a matter of choice and businesses may not contract out of the requirement to properly categorise an individual as an employee for tax purposes and to operate PAYE.   
  
• The Karshan Decision is further reflected in the Revenue Guidelines by deeming certain types of workers who are only engaged on a once off basis as potential employees subject to the application of the five-step test. Those part-time, seasonal or casual workers were previously not considered to be employees as there was no continuous employment obligation.

Updating of the Code of Practice on Determining Employment Status, published by the Department of Social Protection, the Workplace Relations Commission and the Office of the Revenue Commissioners in November 2024 (the "Code"):

The Code, similar to the Revenue Guidelines, was updated and now provides a detailed breakdown of the five-step test introduced in the Karshan Decision. 

Key provisions of the Code are:

• The Code provides an updated list of the typical characteristics of an employee which focuses on issues such as the control exerted over a worker, regular remunerative arrangements, and the provision of resources to perform the role.
  
  
• The Code also lists the typical characteristics of self-employment. Examples include workers who own their own business, who are exposed to financial risks, who have control over how and when the work is done, who provide the same services to one or more businesses and has bargaining power such as agreeing the price for a job. 
  
  
• The Code gives guidance on the use of Personal Service Companies (PSC).  This is where a contractor engages with a business to provide their services through their own limited company of which they are usually the sole shareholder/director. As the worker is the owner/director of the PSC, the PSC pays the worker who would return PRSI as Class C. However, when applying the five-step test in accordance with the Code, the Department may look behind the PSC and require the end user (the contractor's customer) to pay PRSI on any remuneration paid to the PSC for the services of the worker.  
  
  
• The Code states that where the Department of Social Protection determines that a worker has been incorrectly classified for PRSI purposes, the employer will be required to pay the relevant PRSI contributions for the employee for the period they were engaged with the business. Importantly, businesses should note that there is no limit on this retrospection.

The issue of determining whether an individual is an employee or independent contractor is set to continue to be of huge importance with the 'Platform Work Directive' due to be transposed into national law by member states by December 2026. The 'Platform Work Directive' introduces a presumption, in certain circumstances that 'platform workers' or 'gig economy workers' being individuals who are engaged to provide services through a mobile or website application are employees as opposed to self-employed contractors. Therefore, this area remains very much a key issue going forward. 

A copy of the Code of Practice on Determining Employment Status is available here:
https://assets.gov.ie/static/documents/code-of-practice-on-determining-employment-status-cb301d37-93cb-4fbf-b45c-6997ed370f04.pdf

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