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Concern at self-employment arrangements undermining worker’s benefit entitlements


Monday, February 8, 2016

In late January, the Government announced a public consultation into the use by employers of mechanisms to avoid employment and tax liabilities. This is a very interesting development that focuses on two quite controversial areas of employment law.

  • The first of these is the practice of treating employees as independent contractors. The legal distinction between the two is clear in theory, but can be blurred in practice.
  • An employee is typically under the direct control of an employer, working for pay. Once an employee is available for work, they are entitled to be paid. An independent contractor, on the other hand, is not under the direct control of the employer and is only paid for services actually provided.
  • The second area under investigation is the use by employees of limited companies to provide their services.

Under this model, there is no direct relationship between the employer and the employee – the only contract is between the employer and the limited company. In this scenario, the limited company agrees to provide the employee to the employer for work. The employee basically works under the control of the employer, but has no legal relationship with the employer.
Both situations have significant implications when it comes to tax and employment rights. Each business model neatly excludes statutory (and other) employment law rights from the relationship.

  • In the first case, the “independent contractor” automatically precludes an employment-type relationship (because an independent contractor is not an employee and can’t access the usual statutory rights).
  • In the second case, there is no direct relationship between the individual and the employer – the only recourse the employee has is to the limited company, which is often a company with little or no resources (and which, frequently, the employee has established themselves at the request or demand of the employer).

The courts have frequently struck down so-called “independent contractor” relationships because they were employment in disguise. Where a so-called “independent contractor” works exclusively for someone under their day-to-day control, the courts are likely to intervene. In other words, an employee in this situation will be able to find a remedy.
The proactive approach taken by the courts may mean that it’s perhaps easier to defeat attempts to disguise employees as “independent contractors”. However, the second focus of the study is a bit more complex.

That’s obviously the use of a limited company. As the law presently stands, the affected employee will not easily find a remedy if the employer decides to terminate the contract with the company on notice. The employee in that case has no automatic recourse to law because his or her only valid complaint will be against the employer – the limited company. The use of limited company vehicles is a relatively recent development in the Irish employment market (although this method of circumventing employment law is being seen more often).

If the public consultation results in the State deciding to take action, it may be difficult to arrive at a practical solution. Generally speaking, the “corporate veil” is sacrosanct – a company enjoys independent legal personality and it is not generally possible to look behind the corporate veil – so even if an individual is effectively an employee, he or she will not easily be able to assert their rights against the employer. That’s mainly because they have no legal relationship with the employer – only with the limited company.
There are also very significant revenue and tax implications to both of the models used above. A genuine independent contractor is responsible for his or her own tax. Obviously this relationship does not involve the deduction of PAYE and PRSI. That factor alone has led to increasing abuse of these contracts in an attempt to avoid paying employment taxes.

Equally, the use of the limited company model can also be an effective way to avoid tax obligations – in this model, the employer is shielded from having to deduct PAYE and PRSI by the existence of the limited company.
It will be very interesting to see what submissions are made. It will be even more interesting to see what the next government does on foot of the consultation process.

It is quite clear that both ministers, when commencing this initiative, have abuse firmly in mind. Among other things, Minister Burton said at the launch that “of some concern to me and my Department is the increasing evidence of self-employment arrangements which undermine worker’s benefit entitlements and increase the burden on compliant tax payers.”


Author

Patrick Walshe

PARTNER


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