Employee or Contractor? The New 5-Step Worker Classification Test

EMPLOYEE   OR   CONTRACTOR                                 EMPLOYERS SHOULD BE VERY CAREFUL.

In Ireland, the key difference is that an employee works under a CONTRACT OF SERVICE and has a formal employer-employee relationship with statutory rights, while a contractor works under a CONTRACT FOR SERVICES and is a self-employed business-to-business arrangement. The actual working relationship, not just the contract title, determines employment status, which is decided by bodies like Revenue or the Workplace Relations Commission (WRC) based on factors like control, mutuality of obligation, and whether the individual is in business on their own account. This distinction affects rights, tax obligations, and social insurance contributions.

The Supreme Court judgement in the KARSHAN CASE outlines a five-step decision-making framework to determine an individual’s employment status for taxation purposes. Businesses who engage workers should use this five-step decision-making framework to determine whether a contract is: a contract of service (the worker is an employee)   OR   a contract for services (the worker is self-employed).

The Tax and Duty Manual Part 05-01-30 explains the decision-making framework and what the judgment means for businesses.

THE 5 STEP DECISION-MAKING FRAMEWORK.

Revenue now applies a comprehensive framework to determine worker status. Understanding these criteria is essential for Irish employers:

1. Control and Direction

Does your business dictate how, when, and where the work is performed? High levels of control suggest an employment relationship rather than genuine self-employment contract.

2. Substitution Rights

Can the worker send a replacement to complete the work? True contractors typically have this flexibility, while employees do not.

3. Equipment and Resources

Who provides the tools, equipment, and materials necessary for the work? Employees typically use employer-provided resources.

4. Business Reality Test

Is the person operating an independent business with multiple clients, business insurance, and their own branding? Or are they economically dependent on your company?

5. Overall Relationship Assessment

Revenue examines the actual working relationship, not just contractual terms. A written agreement (contract) alone does NOT determine the employment status.

 

Remember if you have been paying someone as a contractor and Revenue or the WRC decide that an employee relationship exists then you, the employer, will be liable for :

• PAYE (Pay As You Earn).
• USC (Universal Social Charge) obligations.
• PRSI (Pay Related Social Insurance) contributions.
• Holiday entitlements.
• Sick pay entitlements
• Other employee entitlements. (maternity, paternity etc. leave).
• Penalties of up to 100% of tax due and Interest.

So, be very careful and if you have any doubts contact your accountant, tax adviser.

 

Revenue has announced a limited-time opportunity for Irish employers to rectify worker classification errors without facing penalties or interest charges.

This disclosure opportunity represents a unique chance to correct worker classification errors without financial penalties. With the deadline of 30 January 2026 approaching, Irish employers should act promptly.

MF Nov ’26.