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Avoidance Or Evasion? Tax And Employment Contracts

Friday, September 4, 2015

There has been some commentary recently concerning the sometimes vexed question of distinguishing between an employee and an independent contractor.

In particular, it is clear that the Revenue Commissioners and the Department of Social Protection are focusing their attention on whether so-called “independent contractors” genuinely have that status. Significant numbers of cases of so-called “contractors” actually being legal employees have come to light.
The tax (and social insurance) advantages of dealing with an independent contractor rather than an employee are obvious. An independent contractor, by his very nature, takes care of his own tax affairs and the employer has no obligation to levy PAYE. In addition, there is no obligation to account for PRSI in respect of a contractor. The relationship is one that can be characterised as “arm’s length” – with the contractor being responsible to Revenue for any money he earns.

You can clearly contrast this with the employment relationship where the onus for accounting for tax/social insurance clearly falls on the employer. An employee has no liability in this scenario and an employer fails to account to Revenue at his peril.
Recent commentary suggests that there may be abuse of the system – that employers are characterising genuine employees as “independent contractors” and dealing with them in that way for tax purposes.

One can see why an employer might be tempted. Quite aside from the tax/social insurance advantages, there are considerable benefits to an employer minimising the number of employees on the books and maximising the number of so-called “independent contractors”.
That’s because the employment relationship is tightly regulated and an employer owes a considerable number of duties and obligations to employees – the majority of which are mandatory in law. An employer’s room for manoeuvre is confined. Among other things, the law dictates maximum working hours, minimum wages and a wide range of other controls. Perhaps most fundamentally, the employer can’t easily dispose of the employee’s services once a year of employment has passed.
None of these factors are present in an independent contractor relationship – it’s one that can be ended at will without much fuss and there is no need at all to monitor how many hours a contractor works, whether they have taken adequate breaks and – generally – whether they are looked after. So it’s easy to see how employers can be tempted.

The courts and the employment tribunals are not blind to the problems that can arise in practice. Over the years, a body of complex principles have emerged that are relied upon when deciding if an individual is a genuine contractor or an employee in disguise.
Recent media coverage refers to internal Revenue documents which flag the difficulty in correctly assessing the nature of a relationship. This is true to a degree – the best that the courts and tribunals have been able to do is set out a list of factors that are indicative of an employment relationship and, equally, a set of factors that are indicative of an independent contractor relationship.

Factors that point towards a genuine independent contractor relationship include the ability to sub-contract the work, the ability to make a profit, the ability to simultaneously work for other parties and the ability to choose how, where and when the work is done.
Employees, on the other hand, enjoy much less control over the circumstances in which the work is done, cannot sub-contract and are generally never in business on their own account.
Problems arise – and this is where Revenue may be encountering acute difficulty – where the lines are blurred. Someone might, for example, be available exclusively to provide services to an employer, but retains the right to choose when the work is done etc. Is that person an employee rather than a contractor merely because they don’t want to scout around for other work? Is someone an employee if they work for two different parties, but agree to perform the services at fixed times during the week? The permutations are endless.

Apparently Revenue are considering how best to deal with the problem although it’s difficult to see what simple solutions present themselves. Ultimately, the only way of making any kind of definitive statement on employment status (or not) is realistically only going to come from an analysis of each individual case which will definitely be time-consuming. Certainly, there isn’t going to be a “one size fits all” solution such as a definition of “employee” – attempting this would be the legal equivalent of trying to nail jelly to the ceiling.


Patrick Walshe