Determining employment status: who is an employee in Ireland

Explore Ireland's employment status landscape post-Domino's case, focusing on the 5-step test and new Revenue guidelines.

In brief

• Supreme Court Ruling: The October 2023 ruling in the Domino's case introduced a 5-step test for employment status.
• New Guidelines: Irish businesses must follow updated guidelines and a Code of Practice for worker classification.
• Legal Importance: Proper classification of employees and contractors is crucial to avoid legal issues in evolving employment laws.

To understand the current landscape on assessing employment status in Ireland, it’s worthwhile to look at what brought us here.

In October 2023, the Supreme Court handed down a landmark ruling in the decade long employment tax battle between Revenue Commissioners -v- Karshan (Midlands) Limited t/a Domino’s Pizza (“the Domino’s case”). Irish businesses were suddenly faced with a 5-step test to self-assess employment status. By May 2024, Revenue published new guidelines for businesses to determine an individual’s employment status for taxation purposes (“the Guidelines”)¹. The Guidelines referred to the proposed development of a new Code of Practice on Determining Employment Status (“the Code”) by an interdepartmental group consisting of Revenue Commissioners (“Revenue”), the Department of Social Protection (“DSP”) and the Workplace Relations Commission (“WRC”). While multiple cases had already begun to make their way through the WRC, somewhat under the radar, the Code was finally published in October 2024. Employers are now tasked with juggling a Supreme Court case, Revenue’s Guidelines, numerous WRC employment rights cases and the new Code.

What was the Domino’s Case About?

This case was the epitome of the new working world – it was a true example of the gig economy in action. It isn't just a story about taxes; it's a lesson in the ongoing relationship between business practices, taxation and the law.

Domino’s Pizza engaged with “independent contractors” to deliver pizzas to customers. The drivers worked when they wanted to work. They were paid a fixed rate per delivery. They used their own cars. They got extra money for advertising. However, they wore uniforms, helped with odd jobs around the store if deliveries were quiet and could only deliver pizzas to Domino’s customers. They did not take calls from customers, took no economic risk and were very limited in their ability to maximise profits or grow their business.

Revenue ultimately succeeded in the Supreme Court, where:

1. The delivery drivers were reclassified as employees recovering retrospective income tax from Domino’s, and
2. The rules to assess employment status were given some fresh (and arguably clearer) perspective.

Revenue immediately removed its Code of Practice from its website. Employers were left with uncertainty regarding their contractor population and how to apply the 5-step test, that lay buried in the highly complex Supreme Court decision.

Revenue Guidelines

By May 2024, Revenue published its updated Guidelines reflecting the 5-step test but with the addition of further commentary on how it should be applied. Employers were directed to “urgently and comprehensively review arrangements” with all “contractors” to assess employment status for taxation purposes.

Evolving caselaw

Although the Domino’s case was all about taxation (and largely confined to its facts), it did not stop employment rights cases being taken by workers in the WRC. Adjudication Officers led the charge and applied the Supreme Court’s test to determine employment status. The workers who brought complaints sought relief from the WRC under the Unfair Dismissals Act and the Organisation of Working Time Act.

While there were a few decisions on the topic, two were of note: Lauren McBride -v- FSR Atlantic Limited t/a ADHD Now and Matthew McGranaghan -v- MEP Music Limited. The Adjudication Officers in both cases considered the employment status for both workers before they could determine the substantive complaints before them. Both cases referred to and applied the 5-step test in their reasoned analysis.

Code of Practice

Since then, things have progressed with the publication of the Code in late 2024. Key messaging from the Code includes:

• Purpose

The purpose of the Code is to offer the public, as well as the decision makers in the DSP, Revenue and WRC a clear understanding on the employment status of individuals. The Code specifies that the decision of one body will not be binding on another body. It is intended to be a “living document” that will be updated in line with market changes, legislative updates and caselaw. The Code will apply to gig/platform workers. 

• Employed/self-employed?

We are reminded that there is no statutory definition for the terms “employed” or “self-employed” in Irish or EU Law. There are numerous definitions of “employee” across legislation, with some being broader than others, so we are reminded of the importance of considering cases on their specific facts.

• Characteristics of employees/self-employed

There is some familiar territory with the inclusion of a list of the typical characteristics of an employee and independent contractor.

Examples include:

• The 5-step test

The Code replicates the 5-step test, with the first three questions acting as a filter. If any of these questions are answered negatively, then an employment contract cannot exist and there is no need to consider further.

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

2. Personal Service: Is the agreement one where the worker is agreeing to provide their own services, and not those of a third party, to the business?

3. Control: Does the business exercise sufficient control over the worker to render the agreement one that is capable of being an employment agreement?

If the above questions are answered positively, the business must consider two further questions:

4. Circumstances of the arrangement: The business must consider whether the terms of the arrangement, in light of the practical/real conditions of engagement (the “factual matrix”), are consistent with a contract of employment or some other form of contract.

5. Legislative regime: Is there anything in the particular legislative regime under consideration that requires a particular approach to be taken.

The Code includes some helpful information about how the decision makers will consider the above tests, such as, in relation to question 2, the business will always be asked additional queries in relation to substitution– who does the work when the worker is absent, and who selects, arranges and remunerates the replacement worker? The decision of one body will not be binding on another body.

• Personal Service Companies (PSC) and Managed Service Companies (MSC)

The Code recognises that business is done in variety of ways, specifically through intermediaries such as PSCs and MSCs, as well agencies. Ordinarily, an owner/director of a PSC who owns more than 50% of the issued share capital must return PRSI as Class S. Revenue will not pierce the corporate veil except in very limited circumstances. However, in an interesting move on the part of the DSP (deviating from Revenue’s approach), it proposes to apply the 5-step test and, where it determines that the PSC/MSC is simply a vehicle through which a contract of service is arranged, will require the end-user to collect and remit Class A PRSI on remuneration paid to the PSC/MSC. This could arguably result in double PRSI payments with the PSC paying PRSI (Class S) and the end-user returning PRSI at Class A. It is proposed that a special collection system will apply to this situation.

The Code also clarifies that for taxation purposes, employees of MSCs will be regarded as MSC employees even if they provide services to a different end-user.

Conclusion

The last 18 months reminds us that the certainty of death and taxes prevails. Appropriate payment of taxes is critical. It is a criminal offence to incorrectly record and report bogus/false self-employment. From a DSP perspective, there is no limitation on the period of retrospection that may be applied in the event that incorrect PRSI was paid for a worker and a range of penalties may also apply.

For now, one thing is for certain – the taxation of workers remains a live and evolving subject.

This article is co-authored by Sandra Brennan, EY Ireland Tax Controversy Partner.