Employment Status
On 21 May 2024, Revenue published guidance outlining the tax implications of the Supreme Court judgment in ‘The Revenue Commissioners v Karshan (Midlands) Ltd. t/a Domino’s Pizza’ on determining employment status for tax purposes.
The Tax and Duty Manual, Revenue Guidelines for Determining Employment Status for Taxation Purposes, explains the five-step decision-making framework that businesses are required to use to determine whether a worker is an employee or self-employed for taxation purposes. The manual also includes a number of practical examples which will assist businesses in determining what the Supreme Court decision means for the taxation of workers they engage.
Revenue previously encouraged all businesses that were engaging contractors, subcontractors or other workers on a self-employment basis to familiarise themselves with the details of the judgment and review their workforce model in light of same. Revenue also reminds businesses that they are responsible for ensuring that the correct taxes are deducted from their employees’ pay and reported through the PAYE system.
With effect from the date of the Supreme Court judgment on 20 October 2023, employers have further clarity regarding the correct approach to employment classification.
While it is clear that employers are obliged to operate Income Tax, USC and PRSI and all employers must ensure that they are properly deducting and remitting all relevant payroll taxes, consideration must be given to Justice Murray’s comments.
In para 284 of the judgement, Justice Murray stated “In the course of the judgement I make some comments about the potential injustice of Karshan being disproportionately penalised by one arm of the State for conducting its business in accordance with the law as it was found by another department of government.”
Obligation to operate Income Tax, USC and PRSI with effect from date of Supreme Court judgment
The range of caselaw and guidance available prior to the Karshan judgment may have resulted in some employers, acting in good faith, misclassifying employees as persons engaged in contracts for services. In many cases, such persons will have been paid on a gross basis and advised to address their own tax affairs and many have done so in the belief that they were bona fide contractors. However, as the Supreme Court judgement, in late 2023, sets out the appropriate tests in relation to classification there should be no reason for employers to have ongoing classification issues for 2024 or any subsequent year.
Notwithstanding the above, Revenue recognises that employers may have faced difficulties in making the necessary adjustments to their payroll systems following the Supreme Court judgement. Revenue is now providing employers with an opportunity to correct any payroll tax issues in respect of 2024 and where relevant, 2025, arising from bona-fide classification errors without penalty or interest. Where liabilities are settled by way of a Phased Payment Arrangement (PPA), interest is applied over the repayment period.
To the extent that payroll arrangements were not in place for 2024 or 2025, this Tax and Duty Manual sets out the settlement terms which apply for those years.
These settlement terms explicitly do not apply to any intervention which was open prior to 20 October 2023. Furthermore, they do not apply to any individual who, under the Code of Practice on Determining Employment Status in effect prior to October 2023, should have been classified as an employee. Likewise, they do not apply to any individual who should have been classified as an employee based on any published decision or determination of the Department of Social Protection, the Workplace Relations Commission, the Tax Appeals Commission or a court. As such, where Revenue is of the opinion that the misclassification has arisen from either careless or deliberate behaviour, the full liability to Income Tax, USC and PRSI and interest and penalties will be pursued as provided for under the terms of all relevant legislation.
Opportunity to make a disclosure for 2024 and 2025
Revenue’s Compliance Intervention Framework (CIF) and the Code of Practice for Revenue Compliance Interventions provide for a consistent graduated response to taxpayer behaviour. Revenue aims to minimise the burden of tax compliance, and we provide extensive opportunities to enable taxpayers to make good any liabilities with minimum consequences.
Revenue invites employers impacted by the Supreme Court ruling to make a disclosure in respect of 2024 and 2025. Revenue will treat any adjustment of liability in respect of both years as a “technical adjustment” as provided for in the Code of Practice for Revenue Compliance Interventions. This means that Revenue will not consider liabilities to have arisen from either deliberate or careless behaviour and a tax-geared penalty shall not apply to any liabilities to Income Tax, USC and PRSI in respect of these years. In addition, fixed penalties will not apply.
To avail of the settlement terms outlined in this Tax and Duty Manual, all disclosures should be submitted to Revenue no later than the 30 January 2026.
Karshan Supreme Court Decision and Revenue Guidelines
Following the Supreme Court’s decision in The Revenue Commissioners v Karshan (Midlands) Limited t/a Domino’s Pizza (the “Karshan”) in October 2023, Revenue have published their ‘Guidelines for Determining Employment Status for Taxation Purposes’ to reflect the principles set out in the Supreme Court judgment in the Karshan Case.
These Guidelines set out the key elements of the judgment and its implications for businesses engaging employees, workers, contractors or sub-contractors. It is important to note that Karshan dealt with taxation. The broader question of employment rights was not before the Court and was not considered by it.
According to the Oxford English Dictionary: “guidelines [plural] [are] ‘a set of rules or instructions that are given by an official organization telling you how to do something, especially something difficult’.”
If Guidelines are rules or instructions “telling…..you how to do something” then this is more than one ordinarily would associate with the word ‘Guidelines’.
The Guidelines refer to workers engaged in particular sectors, such as construction, telecommunications, information technology, healthcare, courier, and entertainment – as well as part-time, casual, seasonal, public sector, and platform workers.
The Guidelines also address the provision of workers through a company and through an employment agency. It confirms that engagement of companies by businesses cannot constitute contracts of service for taxation purposes, but notes that the status of workers contracting with the company should be analysed.
The Guidelines provide several examples designed to assist businesses by illustrating how the Karshan Judgment may be applied to certain working arrangements. For tax purposes, the treatment of individuals engaged as employees (‘contract of service’) differs from those engaged as contractors/self-employed (‘contract for service’).
Each business making payments to individuals needs to correctly determine whether individuals are employed or self-employed based on the facts and circumstances of each relationship and payment. While it is usually clear whether an individual is employed or self-employed, confusion has arisen in certain cases.
There is no single, clear legal definition of “employed” or “self-employed” in Irish or EU law.
Five Questions from Karshan
The Guidelines refer to five key questions set out in Karshan:
- Does the contract involve the exchange of a wage or other remuneration for work completed?
- If so, is the agreement one pursuant to which the worker is agreeing to provide his/her own services, and not those of a third party, to the employer?
- If so, does the employer exercise sufficient control over the inferred employee to render the agreement one that is capable of being an employment contract?
- An examination of the “entire factual matrix of the engagement” to determine the arrangement’s characteristics.
- Consideration of whether any legislation requires an adjustment or supplement to the above questions.
Practical Commentary and Examples
The Guidelines contain commentary on workers engaged in specific sectors, including construction, telecommunications, IT, healthcare, courier, entertainment, part-time, casual, seasonal, public sector, and platform workers.
The Guidelines also provide commentary on the provision of workers through a company and through an employment agency, confirming that engagement of companies cannot constitute contracts of service but analysing the status of workers contracting with the company.
Several practical examples illustrate how the Karshan Judgment may be applied to working arrangements. Employers are expected to provide evidence of analysis applying the five-step framework, including looking beyond the simple wording of contracts when necessary.
The Guidelines note that relationships between businesses and individuals can change over time, and employers should regularly review relevant arrangements to ensure the correct determination is applied consistently.
Conclusion and Key Takeaways
From the perspective of businesses, Revenue’s interpretation of the Karshan Judgment provides clarity on determining the employment status of workers for taxation purposes. Businesses engaging contractors, sub-contractors, or other workers on a self-employed basis should familiarise themselves with these Guidelines.
Businesses should conduct comprehensive reviews of arrangements with all workers in light of the five-step framework to ensure correct classification. It is particularly important in the industries specifically mentioned in the Guidelines.
Employers should retain evidence of analyses conducted and regularly review engagements to ensure the framework continues to be applied correctly as relationships evolve. Section 4.3 of the guidance confirms that engagements of companies by businesses cannot be contracts of service or employment for taxation purposes.
These Guidelines clarify the tax treatment of individuals engaged as employees (‘contract of service’) versus self-employed contractors (‘contract for service’) following the Supreme Court judgment in The Revenue Commissioners v Karshan (Midlands) Ltd t/a Domino’s Pizza (October 2023).
They outline how employers should determine employment status for tax purposes, the relevant deductions, and obligations for both PAYE and self-assessed workers. The full PDF provides detailed guidance on the judgment’s implications for businesses engaging employees, contractors, or sub-contractors, including PRSI considerations and relevant State bodies’ responsibilities.