Greater clarity is emerging in how the Irish Revenue Commissioners (“Revenue”) and the Workplace Relations Commission (“WRC”) will apply last year’s significant Supreme Court decision in Revenue Commissioners v Karshan (Midlands) Ltd t/a Domino’s Pizza (the “Karshan Case”) in practice when assessing whether an individual has “employee” status or not.
In a welcome development, a revised Code of Practice on Determining Employment Status (the “Code”) reflecting the updated position on determining employment status post the Karshan Case was recently published. While the Code does not have binding legal status, as it can be taken into account by Adjudication Officers when determining whether an applicant has employee status and consequently is eligible to bring a variety of employment law claims, it is vital that employers are familiar with it when (i) structuring their contractual arrangements; and (ii) interacting with hired individuals in practice.
This article will discuss the Code in more detail, some potential mismatches in treatment between Revenue and the Department of Social Protection in the context of “intermediary arrangements”, and how the WRC has decided questions of employment status post the Karshan Case in practice.
Matheson commented last year on the Revenue Guidelines for Determining Employment Status for Taxation Purposes, which were published following the Karshan Case: New Irish Revenue Guidance on Determining Employment Status (the “Revenue Guidance”).
The Supreme Court’s Five-step Framework
The Supreme Court in the Karshan Case set out a new five-step framework to be followed in determining employment status:
1. Wages? Does the contract involve the exchange of a wage / remuneration for work provided?
2. Own Services? If so, is the worker is agreeing to provide their own services, and not those of a third party, to the employer?
3. Control? If so, does the employer exercise sufficient control over the employee?
The first three questions act as a “filter” – if the answer to any of them is no, then the individual cannot be an employee. However, if all three questions can be answered in the affirmative, the analysis under questions 4 and 5 will be undertaken.
4. Terms & Working Arrangements? If 1 – 3 are satisfied, the decision maker must then determine whether (i) the terms of the contract between employer and worker; and (ii) the related working arrangements are consistent with an employment contract, or with some other form of contract.
5. Other considerations. Finally, it should be determined whether there is anything in the particular legislative regime under consideration that requires the court to adjust or supplement any of the foregoing.
What’s new? The Code
The Code makes it clear that the Supreme Court’s five-step framework will be used by the WRC as a test to determine the employment status of an individual. It discusses in some detail each limb of the test and is largely consistent with the Karshan Case. As such, there should be few surprises here for employers who have become used to the application of the five-step framework in practice via WRC caselaw over the past year (as discussed below).
One questionable factor is how the Code places questions of integration (the extent to which a worker “is an integral part of the operations of the business/person engaging their services” rather than carrying out merely “peripheral or accessory” work) under the third limb of the five-step framework, namely that of “control”. The Karshan Case is clear that “integration” is a factor that falls under the fourth limb of the framework; it is an element of the factual matrix that can be taken into account only if the first three questions are answered in the affirmative.
The Code provides helpful lists of potential characteristics of an “employee” on the one hand and of a “self-employed person” on the other. Examples include:
| Employees | Self-employed persons |
| Typically cannot subcontract work | Typically free to hire other people on terms they specify |
| Receives fixed wage | No fixed wage / exposed to financial risk |
| Works a set pattern / number of hours per week | Control the hours of work in fulfilling the job obligations |
| Receives expenses and other employee benefits | Provides the necessary materials / equipment to do the work |
| Employer is liable for employees and responsible for insurance | Maintains their own insurance cover |
These lists were also included in the previous Code and the relevant factors are familiar features of employment status assessments. The Code provides that these characteristics should be assessed as part of the fourth limb of the framework. Employers should pay close attention to these factors when structuring their contractual arrangements, though the relative importance of each will depend on the facts of each scenario.
It is also worth noting the serious consequences for any individual who is engaged as an employee but is knowingly recorded and reported to the Revenue Commissioners and the Department of Social Protection as a self-employed person. This is known as ‘false / bogus self-employment’ (further discussed in the Code) and is a criminal offence.
Further, the Code specifically notes that “gig economy” workers will be considered under the five-step framework like any other worker, notwithstanding complexities in their contractual arrangements.
“Intermediary arrangements”
Notably, the Code differentiates between employment status assessments conducted by Revenue for individuals engaged through intermediary companies, and those conducted by other decision-makers or adjudicators. The reference to ‘intermediary arrangements’ includes the use of personal service companies and managed service companies. However, it should be noted that the tax implications of these ‘intermediary arrangements’ should be viewed from two different perspectives:
(i) The relationship between the end user and the intermediary company; and
(ii) The relationship between the intermediary company and the individual engaged by that company to provide the services.
The Revenue Guidance and the Code provide that, for taxation purposes, Revenue cannot, except for in the limited circumstances provided for in tax legislation, “look through” corporate structures. On this basis, as regards the relationship at (i) above, it is sufficiently clear that, except in those very limited circumstances, Revenue should not look to impose payroll taxes in respect of payments made by the end user to the intermediary company.
As regards the relationship referred to at (ii) above, while an engagement through an intermediary company could constitute genuine self-employment, the Code and the Revenue Guidance confirms that the five-step framework will be applied to such arrangements and it is possible that a decision-maker or adjudicator may determine that that the individual carrying out the work is engaged under a contract of service for the end-user, bearing in mind that those who are office holders will always be subject to payroll withholding taxes.
Revenue / Department of Social Protection – potential mismatches in treatment?
In many situations, the individual engaged by an intermediary company to provide services to the end user is likely to be the majority / sole shareholder in and a director of the intermediary company, which means that, from a social security perspective, they cannot normally be an employee of that company for PRSI purposes under social welfare legislation. Rather, they must be classified as self-employed and are liable to pay PRSI at Class S. This can lead to a difference in treatment for that employee from a tax and social security perspective. However, this practice is one which is now well established.
In this regard, the Code notes that “[d]ecisions of the Department of Social Protection or the WRC or Revenue are not binding on each other” and separately notes in the context of intermediary arrangements that in “looking at all the facts and circumstances of the case, it is possible that a decision-maker or adjudicator may determine that the end-user is, in fact, the employer for PRSI purposes.” The Code further notes:
“An end-user who is found, for PRSI purposes, to be the employer by the Department of Social Protection will be required to return employer and employee PRSI at Class A. While PRSI is normally collected through the PAYE system, in circumstances where an intermediary arrangement continues in place, this cannot be done, and the special collection systems will apply.”
This potential mismatch between the treatment of these intermediary arrangements by Revenue and the Department of Social Protection may cause a lack of certainty and complex administrative practices for end-users. The commentary in the Revenue Guidance regarding intermediary companies provided some welcome clarity for businesses and practitioners, but the aforementioned commentary in the Code has ‘muddied the waters’ again somewhat. In addition, in practice, it could lead to circumstances where ‘two layers’ of (employer and individual) PRSI are being paid – firstly, by the end-users, and secondly, by the intermediary company. Or perhaps the Class A classification for the end-user could only arise (after an analysis of the five-step framework) in circumstances where the employee engaged by the intermediary company is classified as self-employed and is liable to pay PRSI at Class S (see our comments on this above).
WRC determinations
Even before the Code was published, the five-step framework has been taken by the WRC as a definitive new test for the determination of employment status, and applied regularly. The Code will only strengthen this approach, so it is worth looking at how Adjudication Officers have approached these cases to date.
The Karshan Case established that ‘mutuality of obligation’ is not a prerequisite to the existence of an employment relationship, placing importance instead on the ‘wage/work bargain’ and the other factors noted above. The WRC has followed the Supreme Court’s lead in this regard; cases such as Brian Pigott v Department of Education in May and Brian Hackett v Institute of Public Administration in July 2024 indicate that mutuality of obligation is likely to be disregarded as an argument by Adjudication Officers. This development has been significantly bolstered by the recent High Court decision, Hanley v PBR Restaurants (t/a Fish Shack Café) which held that the Karshan Case test should be applied rather than mutuality of obligation, even in circumstances where the decision under appeal pre-dated the Karshan Case. Although the factual analysis is ultimately quite similar, the removal of mutuality of obligation as an absolute prerequisite increases the burden on employers to prove their case.
The WRC has also applied the Karshan Case to instances of “gig working”, as in Lauren McBride v FSR Atlantic Ltd t/a ADHD Now. The complainant worked as an assistant psychologist for eight hours over the course of a month, despite being promised 35 hours a week and later 2 hours a day. Despite considerable flexibility as to her working location, the fact that she used her own laptop, and a lack of sanction for refusing work on one occasion, the Adjudication Officer found that the complainant was an employee by applying the five-step framework. A case such as this might have been ruled in favour of the employer pre the Karshan Case on the basis of mutuality of obligation, and it is a good example of how things have changed for employers in practice when it comes to assessing the risk of employee status being determined.
The most significant WRC case following the Karshan Case is Matthew McGranaghan v MEPC Music Limited, decided in August 2024. In this case, a fiddler for the Michael English Band brought various claims against the company arising out of his termination, including unfair dismissal, failure to pay in lieu of notice of termination, and compensation for Sunday working. Mr McGranaghan was dismissed without notice or payment in the context of an ongoing disagreement with the company about his employment status and attempts to be classified as an employee.
The Adjudication Officer considered that (i) Mr McGranaghan did perform work in exchange for payment, (ii) was only in exceptional circumstances allowed to engage a substitute, and (iii) had no flexibility regarding where he worked, what he played and the uniform he was required to wear. As such, the first three criteria in the Karshan Case were satisfied, and the Adjudication Officer found that the facts of the case could not support the position that Mr McGranaghan was self-employed. He was therefore an employee and was awarded €43,840 as compensation for the various breaches of his employment rights.
The WRC, similar to Revenue, are taking the criteria in the Karshan Case seriously and looking more closely at supposed contractor arrangements. Companies or those engaging contractors will need to consider how their contractual arrangements are structured in order to avoid falling foul of this new test. This will be even more pertinent now that the Code has been published.
The Employment, Pensions and Benefits Group and the Tax Department at Matheson are available to guide you through the complex question of employment status, so please do reach out to Employment partner Ailbhe Dennehy or Tax partner Aidan Fahy or your usual Matheson contact.