Determining employment status for taxation purposes

This update has come following the recent outcome of The Revenue Commissioners v Karshan (Midlands) Ltd. t/a Domino’s Pizza, which found that the delivery drivers for Domino’s Pizza were employees rather than contractors for income tax purposes.

The Supreme Court in the abovementioned case set out a framework built around five questions which it considered to be necessary in determining employment status. The guidance published by Revenue expands on those questions to aid in the determination.

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

Firstly, it is necessary to establish if there is an exchange of remuneration before a working arrangement can be categorised as an employment contract. The consideration must involve a promise of some kind by the worker to work for the employer, but it does not necessarily have to involve a continuous obligation into the future to provide work. For example, an individual undertaking a security role at one sporting event for a set fee would amount to an employment contract, whereas an individual providing stewarding services at one or a series of matches in an unpaid capacity would not be treated as an employment contract. Payment of expenses made to volunteers with the purpose of reimbursement for expenses incurred to allow them to undertake their work for an organisation whose functions and aims are both altruistic and non-commercial does not amount to consideration in the context of this work/wage bargain. If it is determined that the contract does involve remuneration, it is necessary to consider the second question.

2. Is the agreement one pursuant to which the worker is agreeing to provide their own services, and not those of a third party, to the employer?

This question considers whether the worker has agreed to provide their services to the business personally and is known as the ‘substitution test’. This test concerns the workers right to appoint someone else as a substitute if he/she is unable or unwilling to do all or part of the work, ie can the worker ‘sub-contract’ or hire assistants. In general, the more restrictions imposed on the freedom of a worker to appoint a substitute, the more indicative the arrangement is that of a contract of employment.

3. Does the employer exercise sufficient control over the putative employee to render the agreement one that is capable of being an employment agreement?

Control refers to the liability, authority or right of a business to exercise control over a worker concerning what work is to be done, when and where it should be done. It is important to note that it is the businesses right to exercise control which should be examined rather than whether or not they actually exercise this right. The actual degree of control will vary depending on the type of work and the skills of the worker. It is expected an unskilled worker will need close direction as to the means and manner by which the work is done while the employer or a skilled worker would not be expected to be in a position to direct the worker as to how to achieve the prescribed objective.

A number of other factors may be taken into account while determining this such as the ‘enterprise test’, integration, notice periods, and the extent to which a business controls the method and amount of payment.

4. Determine whether the terms of the contract between the employer and worker, interpreted in the light of the facts and circumstances, and having regard to actual working arrangements between parties are consistent with a contract of employment or with some other form of contract having regard to whether the arrangements point to the putative employee working for themselves or for the putative employer.

If the first three questions are answered affirmatively, consideration should be given to the entire facts and circumstances of the engagement. The guidance provides four specific matters to consider at this stage:

1. The first matter to consider is that the contract itself must be interpreted in the light of the facts and circumstances in which it was concluded.
2. One must take into account the actual dealings between the parties, for example:
   • The manner in which the work was completed,
   • The facts and realities of the situation on the ground, and
   • The real arrangement on a day-to-day basis between the parties.

• The facts and circumstances must be considered wholly on their own merits, without presumption from the previous questions at phases one and two.

1. If the contract is not one of employment then it is something else. So, to determine whether or not it is an employment contract it must be identified what type of contract it is. For example, is it an employment relationship or joint-venture relationship?

5. Determine whether there is anything in the particular legislative regime under consideration that requires adjustment/supplementation of any of the foregoing.

Finally, consideration should be given to any legislation that requires an adjustment or supplement to any of the foregoing questions in the particular circumstances of the relationship being considered. This may occur where there are legislative provisions in which it is intended to carry a different meaning.

Revenue has stated that “a worker’s employment status for taxation purposes is not a matter of choice” and that the Supreme Court judgment provides clear steps on the determination of employment status. It is recommended that professional advice is sought for employers considering the engagement of contractors.

If you have any queries in relation to the determination of employment status, please contact out Tax team.