The Updated Code of Practice on Determining Employment Status: What are the key takeaways?               

The Department of Social Protection has revised its Code of Practice on Determining Employment Status (the Code) following the key Supreme Court decision in The Revenue Commissioners -V- Karshan Midlands Ltd T/A Dominos Pizza [2023] IESC 24 (Karshan). The revised Code expressly adopts the framework for the determination of employment status from the principles laid down in Karshan, and follows updates made to the Revenue Commissioner’s Guidelines for Determining Employment status for Taxation Purposes (the Revenue Guidelines), published in May 2024, and the recent decision of the Workplace Relations Commission (WRC) in McGranaghan v MEPC Music Limited, in which the WRC applied the criteria outlined in Karshan for the first time.

The Code provides welcome guidance for businesses, employers, employees and workers on determining whether a worker shall be considered an employee or self-employed. This has important implications including for the tax treatment of an individual, PRSI and associated social welfare benefits and in respect of employment-related rights, such as protection from unfair dismissal, sick leave and family leave entitlements. In this update, we consider some of the key aspects in the revised Code.

What’s new?

The Karshan five-step framework – how was this considered in the Code?

• There is no single legal definition of the terms “employee” or “self-employed” under Irish law, and the Code therefore clarifies the factors to be considered in determining whether a worker is an employee, or self-employed, having specific regard to the “five-step framework” outlined by the Supreme Court in Karshan.
• The Code provides additional guidance on the five-step framework to be used to determine employment status. To recap, this involves the following three “filter” questions:

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

The first question to ask is whether the parties have entered into a contract at all. Arrangements which do not involve the exchange of wages or remuneration for work cannot be categorised as an employment contract. For a contract of employment to exist, there must be an offer of work, acceptance of that offer, and resulting payment or consideration. In line with Karshan, just one engagement or a series of separate engagements can potentially give rise to contracts of employment.

2. Is the worker agreeing to provide their services personally?

The key question here is whether and to what extent the worker has a right to appoint someone else as a substitute/subcontractor to undertake the work. In assessing this factor, the Code notes the questions – who does the work when the worker is absent? And, who selects, arranges and remunerates the replacement worker? The level of substitution available shall also need to be considered (for instance, to what extent does the business in fact decide the substitute), and to what extent is the substitute controlled and paid by the business or by the worker.

Essentially, the more restrictions imposed on the freedom of a worker to appoint a substitute, the more likely it is to indicate a contract of employment.

3. Does the business exercise sufficient control over the worker?

This question considers to what extent does the business have the right to exercise control over the worker, concerning what work should be done, and how and when and where it should be done. The issues of “enterprise” and “integration” are central to the question of control. Enterprise is the extent to which a worker carries risk, and their ability to make financial gain through their own ingenuity/efficiency. Integration is the extent to which a worker is an integral part of the operations of the business (as opposed to those carrying out peripheral or ancillary work).

If any of these three questions are answered negatively, according to the Code, there is no contract of employment. 

4. If the three filter questions are answered affirmatively, consideration must be given to whether the terms of the contract or arrangement between the business and the worker, interpreted in light of the actual factual matrix and working arrangements, point to the worker working for themselves, or for the business/employer?

The Code notes that while a detailed written arrangement may carry significant weight, the day-to-day reality of the relationship shall need to be considered. The Code asks, do the facts indicate the worker’s providing services on their own account, or do the facts indicate the worker is providing services on behalf of the business.

When considering this step four, the Code provides some specific instructive factors which may be indicative of when a worker may be considered an employee, and of when a worker may be considered to be self-employed. We have outlined a selection of some of these factors in the table below, but regard should be had to the full list of factors and important considerations regarding these factors, outlined in the Code.

5. Is there anything in the particular legislative context which requires a particular approach be taken?

The Code emphasises that, in the context of the WRC determining employment status, the definitions of contract of employment, employee and employer differ depending on the relevant employment legislation, and each case lodged with the WRC is to be decided on its own facts.

Special circumstances and developments in the labour market – what does the Code say?

The Code outlines some guiding principles in respect of certain specific areas, including:

• PRSI classifications for company owners: The Code clarifies the rules for the classification of individuals who own or control a company.
• Agency workers: The Code provides guidance on who is considered the employer of an agency worker, noting that this depends on which rights the agency worker is seeking to enforce. For example, under unfair dismissal legislation, the employer is the hirer for who the employee works, rather than the employment agency. Under many other employment-related enactments, the party liable to pay the wages of the agency worker shall generally be considered to be the employer.
• Intermediary agreements: There are two main intermediary structures recognised in the Code which are used by businesses instead of directly engaging with a worker, personal service companies, and managed service companies. For both structures, the Code emphasises that the same five-step framework applies for determining whether a worker is self-employed or an employee.
• Workers in the digital/gig economy: Similarly, while the Code acknowledges that the new forms of work which have emerged in respect of the digital or gig economy can cause challenges to the determination of employment status (noting the method of engagement of such workers differs from traditional methods), such workers shall still be categorised as either employees or as self-employed, and the same five-step framework should be applied to determine employment status.

What are the consequences of a determination of employment status?

The Code elaborates on the implications of employment status, including:

• Tax and PRSI obligations: Employees will have income tax, USC and PRSI deducted from their income via payroll,  self-employed workers are obliged to pay preliminary tax and file their own income tax returns.
• Social welfare benefits: The Code notes while self-employed persons are entitled to many of the benefits and entitlements available to employees, there are exceptions, including the entitlement to claim Illness Benefit.
• Employment rights: Employees have rights in respect of working time, holidays, maternity/parental leave, protection from unfair dismissal, which do not apply to self-employed persons.

Criminal sanctions and PRSI pay back

The Code outlines that a business which falsely and knowingly records a person, who is in fact engaged as an employee, as a self-employed worker, commits a criminal offence.

If the Department of Social Protection determines that a worker has been incorrectly classified as being self-employed for PRSI purposes, the employer shall be required to pay the relevant PRSI contributions for the employee(s), for the full period in question, and the business may be subject to sanction under social welfare legislation. The Code emphasises there is no limitation on the period which will be considered for these purposes, highlighting the importance of a business ensuring it has considered and reviewed its classification of all workers, in line with the five-step framework.

What lies ahead?

The Department of Social Protection has confirmed the Code is intended to be a “living document”, which will continue to be updated to reflect future changes in the labour market, legislation and case law. For now, however, employers, employees and workers should review the Code and the Revenue Guidelines for the additional clarity provided on determining employment status.