Are you sure your independent contractors cannot claim employee status?

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Independent contractors or employees?

One of the many concerns for companies today is creating cost-effective worker relationships. Many look at creating engagements where the worker earns on a commission-only basis. Tied agents and contractual agreements are the norm within Financial Services for example. What many employers fail to understand is the very important distinction between an employee and an independent contractor, as both are covered under different statutory protection and taxation classes. Referred to as a ‘contract of service’ or a ‘contract for services’, there is no comprehensive statutory definition of either employee or contract of employment. It has been largely left to the Courts to define these concepts on a case-by-case basis. Simply stating that the person is a contractor on an agreement does not suffice. A worker who is a self-employed in one company is not necessarily self-employed in the next. Equally, it is also possible to be employed and self-employed at the same time in different jobs. The area is quite broad so the most salient points will be outlined in this article.

What are contracts of and for service?

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A contract of service, is an employee – for example, a Chauffeur. A contract for service, is an independent contractor – for examp

le, a Taxi. Defining the difference between both classes of employment relationship is not always so obvious. For both parties this arrangement can provide greater freedom but can also remove the contractor’s social security benefits and much employment law protection.

How do Courts differentiate between contracts of service and contracts for service?

Using the following tests among others, the Courts decide the employment status: control, integration and multiple or mixed tests. The overriding answer sought will be, whether or not the worker is in business in his or her own right.

Control test: The control test simply asks is the person under the control of the employer. Can the person decide how the work is done and when? Are they tightly supervised? Can they hire others to do the work on their behalf and benefit from this arrangement? A contractor is usually hired to do a job or task because of their expertise and left to do it as they wish within a certain timescale or target for a set fee.

Integration test: The integration test asks to what extent is the worker integrated into the business. Do they go to the company social events? Are they on the company internal mailing lists? Does the worker play a vital part in the company’s operations? A contractor would not usually be integrated into the business in any of these ways.

Multiple of Mixed test (also known as enterprise/economic test): The multiple or mixed test is favoured by Irish Courts. The test asks a series of questions regarding remuneration and benefits such as sick pay, holiday pay, PAYE and PRSI deductions. If these exist – who pays them? Does the worker share in the company’s profits and loses? Are tools and equipment supplied by the contractor? Is the employer entitled to exclusive service from the contractor? Depending on the answers given, the Courts will decide whether or not the workers relationship is genuine self-employment or an attempt by an employer to avoid protective legislation. A contractor would usually manage their own tax affairs, be paid a set fee, use their own equipment and have the option to work for other companies.

Sample questions help determine the workers employment status

Below is a list of some questions for you to consider. The majority should be answered with a no if you deem the worker to be an independent contractor. If you find you answer many with a yes, then you may need to consult with a professional on how to decrease the risk of the worker being classed as an employee. The risks include lengthy legal battles, potential fines, and backdated payments of unpaid taxation. A worker can make a claim for employee status at any time. Many do so when they go to claim unemployment/illness benefit or State Pension, for example. Previous successful claimants argued employee status once they realised, as an independent contractor, these benefits were not available to them.

Kala ManagementDoes the worker:

  • Own their own business
  • Manage their own tax affairs
  • Use their own know-how, equipment and materials
  • Agree a price/fee in advance
  • Can subcontract the work to others on their own separate terms
  • Can carry out the work as they see fit
  • Can offer the same services to many businesses concurrently
  • Can work for other companies concurrently
  • Provides their own insurance cover
  • Depending on the task, can work from a venue of their choice
  • Wears their own clothing and brands themselves as they see fit.

This is a highly complex and very important topic. Ensure you know where you stand with all your employment relationships to avoid unnecessary risks to your business.

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Written by Gillian Knight, MSc FCIPD, Managing Director, Kala Management Solutions Limited.    Send article as PDF   

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