Employee or Self-Employed

Employee v Contracted

Social insurance treatment depends on whether a person is categorised as an employee or an independent contractor.  As is the case in other contexts, the distinction may be fine in some cases.  Parties may seek to label themselves in a particular way, generally as self-employed, so as to avoid the employer’s obligation to pay the employer’s PRSI and to withhold and remit both income tax and employee’s PRSI.

Whether or not a person is an employee is a matter of substance rather than label.  The label may have some significance, but the parties may not change what is, in fact, an employment relationship simply by labelling it.

The distinction is sometimes referred to as one between a contract of employment and contract of service and contract for a service. A contract for services refers to an independent contractor type relationship.  A contract of service refers to an employment contract.

Risk of Wrong Categorisation

The issue is of critical relevance in several contexts. It determines entitlement to whole range of employment rights such as unfair dismissal, holiday pay, minimum notice, redundancy rights etc. An employer is vicariously liable for most civil wrongs (torts) on the part of his employee.

An employer and employee run significant taxation and social insurance risks if they falsely or incorrectly categorise a person, as self-employed when he should have been categorised as an employee.  The risk for the employer is particularly significant, as it may be liable for arrears of tax,  PRSI and USC, which were not withheld, together with  penalties and interest on them.

The issue arises commonly,  on a Revenue audit.  The issue may also arise in a claim that by the Department of Social and Family Affairs that the person is in insurable employment.

Revenue, the Department of Social and Family Affairs and other bodies have together produced code of practice and guidance on determining the employment or  self-employment status of individuals.

Criteria Tests

One widely accepted test for self-employment is the business on his own account test.  An employee is not in business on his own account.  Consideration is given to whether

• he takes the financial and other risks of the business and to the extent to which he does so
• whether he hires his own helpers;
• the degree of responsibility for investment and management;
• whether he may profit from sound management and performance of the task;
• whether he provides his own equipment.

The position is determined by reference to the facts as a whole.  The various factors and elements are really indications one way or the other and are not mechanically applied.  The overall position should be considered.

Effect of Label

The existence of a contract of service or for services so labelled, as the case may be, is a factor, but is in no way determinative.  However, where a contract is in place, it appears that the onus of displacing its, lies in the party who alleges that it does not accord with the fact. Commonly,  Revenue will seek to show that an apparent independent contractor (contract for services) relationship is in fact an employment (contract of  services) in substance.

If the conduct and practice of the person concerned accords with the contract, this will tend to uphold its validity.  Conversely, the conduct and practice is inconsistent with the contract in relation to matters which  should be governed by the contract, this tends to undermine its validity.

Key Indicators

Formerly control was the principal test.    The historic test of an employee as against a self-employed person was whether the employer could control not only what the employer must do, but also how he must do it.  This older test becomes less relevant, with modernised working conditions and terms. The test is still of importance, but is much diminished in significance in modern times.

The ability to decide how the work is done and the ability to subcontract and delegate the work remains  a significant indicator of a self-employment. The provision by the person of his own facilities, services and equiment is also strongly indicative of self-employment.

In a case involving shared fishermen whose payment consists exclusively of share of the value of the catch, they were held to be in self-employment.

A further test considers the degree to which the person concerned, is integrated into the organization.  This may  tend to show that he is not trading with, it as an independent person on his own account. The courts also consider the economic reality and substance of the matter.

The obligation of the employer to provide work is significant.  If the employer is obliged to provide work and the employee is obliged to do it, then this points strongly towards a contract of employment or of service.

The Revenue has published a code of practice on the critical distinction between employee and independent contractor.  This is of not binding on the courts but is helpful guide in relation to the application of law.  In particular, it is likely to be used by deciding officers in making their decision on social insurance issues.

Controlled Company

A person may be an employee of his own company.  PAYE obligations  apply to both employment income and directors fees. Schedule E rules apply to employment income and directors fees.

A person may be an employee notwithstanding that he is the controlling shareholder.  The fact that he has the control over the company, does not preclude his being an employee.

Revenue deem many  majority shareholders  to be in business in their own account.  However, each case is different and there is no inconsistency in a major shareholder being an employee and being categorized as such. A majority or even the sole shareholder may be employed under a contract of service.

Directors & Social Insurance

Company directors may be employed or self-employed for the purpose of social insurance contributions.  Non-executive directors, who are not employees,  will be self-employed by definition.  These are directors whose role is limited to the function set out in the Companies Acts as such as controller and officer of the company.

Generally, where a director is controller of a company, the presumption will be that he provides services under a contract for services, as a self-employed person.  With a lesser degree of control, the entirety of the circumstances will determine whether there is a contract of service or contract for services.

A director will be accepted, by concession, as being a self-employed contributor,  if his total reckonable income or reckonable emoluments and not reckonable earnings is less than an amount prescribed.

The 2013 Act provided that a working director with a shareholding of 50% or more in a company will not be regarded as being insurable as an employed contributor in the company. Company directors holding 50% or more of the shareholding of a company are not normally regarded as falling within a normal employer/employee relationship and were therefore, deemed not to be employed under a contract of service and liable for PRSI Class A contributions (as an employee). Instead, such company directors are deemed to be employed under a contract for services and to be liable for PRSI Class S contributions (as a self-employed person).

Spouses & Partners of Self-Employed

The 2014 Act   provides for the transposition of Directive 2010/41/EU on the application of equal treatment between men and women engaged in self-employment activity, in so far as that Directive relates to ensuring that the spouse or civil partner of a self-employed worker can benefit from social protection in accordance with national law. Liability for social insurance contributions extends to spouses and civil partners of self-employed contributors who are not business partners or employees, where they perform the same or ancillary tasks.

Liability for self-employment PRSI contributions in the case of such spouses and civil partners is subject to the same annual income threshold that applies to self-employed contributors in general, i.e. €5,000. The principal benefit of insurability as a self-employed contributor is access to long-term pensions, including State pension (contributory).

Self Employed Contributors

Self-employment PRSI contributions  provide cover for maternity benefit,. Compliance with the Directive required that Member States take the necessary measures to ensure that female self-employed workers and spouses be granted sufficient maternity allowance cover during periods of interruption in their occupational activity due to pregnancy or motherhood.

The 2016 Act extends eligibility for Invalidity Pension and Treatment Benefit to persons paying the class S (self-employed) rate of PRSI. The 2016 Act provides for the addition of Paternity Benefit to the list of schemes for which class S contributions (payable by self-employed persons) are reckonable.

The 2016 Act provides for the extension of eligibility for Invalidity Pension to self-employed persons.  It provides for a technical amendment to the legislation governing entitlement to Illness Benefit which copper-fastens the existing practice and policy intention whereby the rate of payment to a claimant is held constant for a period of 312 benefit days (one year).