Independent Contractor v Employee - Key Considerations

Situations of so-called false self-employment often arise where a working relationship is misclassified as a contract for services or commercial agreement when it should, according to well established tests of common law be considered a contract of services otherwise referred to as a contract of employment.

What is the difference between an Independent Contractor & an Employee?

The difference between whether an individual is employed or self-employed is sometimes unclear. The employment relationship is essentially one based on contract, so it is first necessary to determine whether a particular individual is employed by the organisation or is merely an independent contractor.

A self-employed independent contractor is retained under a contract for service, whereas an employee is employed under a contract of service. This distinction is vital in determining who, properly, for the purposes of the legislation can be defined as an employee.

Criterial on whether an individual is self-employed include:

• whether they own their own business.
• they are exposed to financial risk, by having to bear the cost of making good faulty or substandard work carried out under the contract.
• they are responsible for investment and management in the business.
• they have the opportunity to profit from sound management in the scheduling and performance of tasks.
• they have control over what, where and how the work is done and whether they do it personally.

These indicators are also set out the Code of Practice on Determining Employment Status, the first version of which was introduced in 2001 and the most recent iteration of this Code was published in July of 2021. This Code is available on the www.gov.ie.

A persons employed under a contract of service i.e., an employee:

• protected by employment statuses.
• their employer can be legally liable for any of their any wrongdoings in the course of their employment.
• their taxation is by PAYE.
• they qualify for a broader range of Social Welfare Benefits.
• they are treated as a preferential creditor.

Consequences

The consequences of an individual’s status as an employee or self-employed person will affect:

• the way in which tax and PRSI is payable to the Collector-General – an employee will have tax and PRSI deducted from his or her income.
• entitlement to a number of social welfare benefits – an employee will be entitled to unemployment & disability benefits etc.
• rights and entitlements under employment legislation – an employee will have rights in respect of working time, holidays, maternity/parental leave, protection from unfair dismissal, etc.
• public liability in respect of the work done.

Contractual arrangements

An independent contractor’s agreement (i.e., contract for service) should be put in place to clarify the nature of the relationship between the parties and the conditions and deliverables associated with the contract. It is important to note that the employer does not exercise the same control over the contractor as he or she would over an employee. It is essential that employers remember that this is a commercial agreement and not an employment contract. Arrangements for getting the job done, etc, should be left as far as possible to the contractor.

It is vital that the correct distinction is made between an employee and an independent contractor as different rights and obligations apply to each. Misclassification is not only a breach of employment legislation but can also have costly implications for the employer.

If you have any further queries on this topic, please contact Fiona on fiona.mulligan@sfa.ie or 01 6051557.