Employee vs. Contractor: How to Classify Workers in Ireland (Quiz included) [2024]
Classifying employees and independent contractors in Ireland
As in many nations, Ireland has different definitions of what constitutes an “employee” and what constitutes an “independent contractor.” Below, we’ll review the general definitions of each, as well as explain in further detail the characteristics that separate one from the other.
What is an employee in Ireland?
Simply put, employees work under a contract of service for their employer and are entitled to a full range of statutory benefits, as well as protections. One of the things that makes Irish labour laws complex is that rather than being one straightforward body of legislation, Ireland’s employment laws are a series of Acts and Orders that are constantly being amended, so it’s crucial to stay on top of what’s going on.
However, the following will give you clear information on the statutory benefits employees are entitled to in Ireland:
- Pension plans/retirement contributions
- Payment that meets, at the least, the Irish minimum wage
- Workers’ comp insurance
- Paid sick leave
- Paid annual leave of a minimum of 20 working days each year
- Parental leave (which is paid for by Irish government social services programs, not necessarily the employer)
- Ten paid bank holidays
Many employers also opt to provide additional benefits, such as private health insurance, extra time off, and life assurance policies to their employees, although the law does not require them to do so.
One final distinction: Employees must be enrolled in the Irish PAYE scheme, which, as mentioned earlier, ensures the correct amount of taxes, insurance, and other payments towards social security programs are deducted from their paychecks by their employer.
What is a contractor in Ireland?
An independent contractor, who’s also often called a “freelancer” or “self-employed,” signs a contract with an employer and, in return for payment, provides services. Unlike employees, independent contractors are not entitled to any benefits, and they must pay their taxes on their own.
Check out the handy table below to help you correctly classify your worker as an employee or an independent contractor.
Classification overview: Employees vs contractors in Ireland
Contractors
Employees
- High level of control over work.
Contractors are their own bosses: They get to decide how, when, and where to complete their work. - Equipment and tools are owned by the contractor. The employer doesn’t provide a laptop or any other equipment to the contractor.
- Less integrated. Contractors tend to be independent, they’re more likely to work remotely, and they use their own tools and equipment. Additionally, they perform “non-essential” jobs that do not require them to be hired full-time.
- No entitlement to benefits and few protections. Contractors are not entitled to any benefits, and they receive few protections, except protection against discrimination and any protections they have written into their contract with the employer.
- Not enrolled in the PAYE scheme. Contractors must pay their own taxes and National Insurance contributions. The employer does not do this for them.
- Does not necessarily receive wages on a fixed schedule. Independent contractors must send invoices to their employers once their work is complete and accepted. They do not necessarily receive a paycheck every two weeks or every month.
- Allowed to subcontract. Contractors are allowed to subcontract their work out.
- Risk of loss. Contractors may assume more risk and liability for the work they perform.
- Non-exclusive services. Contractors can provide the same services to more than one organization.
- More direction from the employer. Employees’ work is supervised by a manager, and the employer has a say over when they work (unless they’re on leave), where they work, and when tasks are finished.
- Equipment and tools are typically provided by the company. An employee will often be given a work computer and may even receive a smartphone from the company or other, similar equipment to do their jobs.
- Highly integrated. Employees are typically more integrated into the employer's organization, and their work is considered essential to the running of the business.
- Entitled to benefits. Employees are entitled to certain employment benefits and protections, such as the National Minimum Wage, paid sick leave, statutory paid holidays, statutory paid maternity/paternity leave, and so on. Irish law dictates that they must also be reimbursed by the company for any work-related travel expenses.
- Must be registered for the PAYE scheme. Employees must be enrolled in the PAYE scheme by their employer so the HMRC can collect taxes and National Insurance from their paychecks.
- Receives wages on a fixed schedule. Employees are paid regularly, whether that’s once a month, once every two weeks, or so on, regardless of whether they’ve turned in a task on time.
- Not allowed to subcontract. Employees are not allowed to have someone else do their work for them.
- No risk of loss. Employees are generally protected from liability for work-related issues. They also aren’t responsible or liable for investing in the business.
- Exclusive services. Employees must only work for the business they are employed by.
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<strong>Take FREE quiz</strong>Tests to classify workers in Ireland
In addition to the table above, the Irish government went one step further and designed a “test” with five components to help define the nature of the employment relationship and ensure you classify employees and contractors correctly.
Quick disclaimer: Should you find yourself in hot water with the Irish judicial system, they won’t just look at one aspect of the classification process you followed. So, remember: No single test should be considered entirely conclusive. These guidelines, while quite specific, are here to aid you in achieving accurate classifications.
Below, you’ll find a list and explanation of the five-factor test the Revenue, the Department of Social Protection, and the Workplace Relations Committee recommend using to classify employees and independent contractors correctly.
Ireland’s five-factor classification test
Here are the five factors Irish employment laws and the enforcing agencies consider, along with an explanation of each:
- Mutuality of obligation
- Substitution
- The enterprise test
- Integration
- Control
Mutuality of obligation
This refers to whether or not there is an agreement that the employer must accept the work performed by the individual. Generally, an employer is allowed to reject work that’s done by an independent contractor if, for example, they feel it’s not up to their standards. They can’t do this to an employee.
Substitution
Employees cannot send substitutes to do work in their place if they just don’t feel like coming into the office for the day. Independent contractors, however, may be allowed to subcontract work to someone else.
The enterprise test
This refers to whether or not the person doing the work could also be considered a business owner who can profit from their own enterprise or risk a financial loss. Someone who’s classified as an employee of a company can’t be considered a business owner and thus would not “pass” the enterprise test.
Integration
This test considers how integral an individual’s work is to the running of the business. If it’s necessary to keep the company going, and the person has thus been “integrated,” they’re probably an employee. If they perform peripheral work and their loss wouldn’t affect the day-to-day running of the business, they’re probably an independent contractor.
Control
This test checks how much control the person has over their own schedule, where they work, and how the work is completed. An individual who sets their own schedule and can work from anywhere they want is an independent contractor.
In the 2018 case of the Revenue Commissioners v Karshan Midlands t/a Domino's Pizza, it took one misstep for the company to be penalized for misclassification. The person who had erroneously classified the workers as self-employed contractors did not pass the mutuality of obligation test, and the court decided this was enough to penalize Domino’s and ensure their workers were reclassified as employees.
As you can see, classifying workers in Ireland is complex. Check if you're classifying them correctly with our free quiz. You can also save yourself time, money, and headaches by managing contractors effortlessly under a single system with Rippling.
Penalties for misclassifying workers in Ireland
As mentioned earlier, Revenue and the other agencies that enforce classification and tax legislation in the Republic of Ireland take misclassification extremely seriously (just ask Domino’s). If you are found to have misclassified your employees as contractors, you’ll find yourself facing financial risks.
Below, you’ll find a list of some of the potential costs, fines, and penalties:
- The worker will immediately become entitled to the benefits and protections afforded employees, while you will be responsible for paying back taxes, interest, and associated fines
- Ineligibility to hire any workers who are non-Irish citizens and need a work visa
- A fine of up to €250,000
- Criminal penalties may include up to 10 years of jail time
- Both the worker's and employer's share of unpaid pension plan premiums and workers’ compensation insurance
- Minimum wage, overtime, parental leave, vacation pay, and other unpaid statutory benefits
These risks aren't exhaustive. Legal disputes, damage to your business's reputation, increased turnover, and government scrutiny are potential outcomes.
One final word about Domino’s: Based on that one mistake, the workers won their case. Misclassification can be extremely costly in more than one way. The bottom line? Be careful, pay attention to the rules, and don’t try to skirt around the law.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
