In 2023 the Supreme Court provided welcome clarification on the test to be applied to determine whether a person is an employee or an independent contractor in the case of Revenue Commissioners v Karshan (Midlands) Ltd t/a Domino’s Pizza. Since then, the rulinghas given employers plenty of food (or pizza…!) for thought in respect of the manner in which their employees carry out their work and the potential exposure if the worker is deemed to be an employee.
The Karshan ruling set out a new 5-step approach to determining the status of a worker, rejecting the former position that “mutuality of obligation” was a prerequisite for an employment contract to exist. The 5-step test which has been established since the decision can be summarised as follows:
- Does the contract involve the exchange of wage or other renumeration for work?
- Is the worker agreeing to provide their own services and not those of a third party to the employer?
- Does the business control what, how, when and where the work is done?
If the answer to any of the foregoing questions is no, the worker would be considered self-employed, subject to question 5. If the answer to the first 3 questions is yes, then the following 2 questions must be considered.
- What do the facts and circumstances say about the true nature of the relationship between the business and the worker? Do the arrangements show that the worker is providing services on their own account or as an employee?
- Is there any legislation that would change the answers to any of the above questions?
In the Karshan case, features of the workers’ duties such as their very limited substitution powers and extra duties (such as packing of pizzas), indicated an ‘employee-status’. Other ‘dependent’ workers who have more liberty with regard to substituting their hours of work may well fall outside of the scope of the ‘employee-status’.
Businesses can now refer to a very clear decision-making model set down in the Supreme Court through which they can determine the correct status of their workers for taxation purposes. Accordingly, the Karshan ruling has been mostly welcomed by employment law practitioners who can now provide advice to clients on a relatively settled area of law.
The Workplace Relations Commission (“WRC”) has been applying the Karshan test in matters brought before it since the ruling was handed down most notably in the Matthew McGranaghan v MEPC Music Limited which was decided in August 2024. In this matter, the Adjudication Officer considered that (i) Mr McGranaghan performed work in exchange for payment, (ii) had little freedom by way of engaging a substitute to replace him and (iii) had no flexibility for where he worked, what instrument he played and the uniform he was required to wear. The Adjudication Officer was therefore satisfied that the Karshan test had been met, that Mr McGranaghan was an employee and awarded him €43,840 as compensation for various breaches of his employment rights.
Employers should also be mindful of the potential exposure to retrospective PRSI contributions (for which there is no limitation period) for employees who have been incorrectly classified as self-employed for PRSI purposes and may be liable to additional penalties, regardless of how long ago the period was. Employers who falsely and knowingly state that an employee is self-employed commit a criminal offence.
Therefore, employers would be well advised to ensure that their workers are assigned the correct status and given the appropriate slice of the pie to avoid potential Revenue penalties, protracted litigation and even criminal sanctions.
For more information please contact Bernard King.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
