What are the Risks of Employee Misclassification in Ireland
The Republic of Ireland, thanks to its young and educated workforce, low 12.5% corporate tax rate and English-speaking population, is both an attractive country to do business in and a doorway into Europe – a crucial country for companies with global ambitions.
In the eagerness to tap into this vibrant workforce, however, companies might look at the lengthy timelines and numerous challenges that come with setting up a business entity in the country and opt for hiring individual contractors instead. Approach this with a high degree of caution. While the gig economy has greatly expanded the number of contractors being hired in Ireland, it’s also increased the confusion around what, exactly, a contractor is. Such confusion greatly impacts taxation, revenue and worker rights.
The Irish government has taken notice, with an update to the Code of Practice on Determining Employment Status in motion to tackle and clarify these issues. To avoid significant fines that might come from these stipulations, or dramatic organizational transformation down the line to avoid them, your company needs to be thinking ahead and asking the following questions.
What, exactly, is the difference between a contractor and an employee in Ireland?
The answer isn’t immediately clear. There is no single, clear legal definition of the terms “employed” or “self-employed” in Irish or EU law, made even more confusing by the recent proliferation of gig workers. Key factors that have allowed companies to differentiate between them can be outlined as such:
Employee Status | Self-Employed Status |
|---|---|
Working directly under the control of another person who directs them on how and where to do work. | Controlling when and how work is done, including whether they do it personally. |
Receiving a fixed wage from their employer and taking no minimal financial risk while doing so. | Owning their business, including taking on financial risk and income uncertainty. |
Inability to subcontract work to others. | Ability to provide the same services to multiple businesses and/or subcontract that work to others. |
Not supplying the materials for their work. | Supplying owned materials, and other necessary equipment, for the work. |
Receiving subsistence payments including benefits. | Responsible for supplying their own insurance. |
Tax automatically deducted from wages through the PAYE system. | Will register for and submit self-assessment tax returns. |
Such a broad overview might leave room for doubt in determining a worker’s status in Ireland. But in order to remain compliant, companies must follow legal guidelines when classifying workers to the best of their ability – or face financial consequences.
This was made clear in a landmark case between a Domino’s Pizza subsidiary and the Irish Revenue department in October last year. The Irish Supreme Court determined that Domino’s delivery drivers should be classified as employees of the company, not contractors. The company will now be required to pay significant back taxes on their employees and will likely also need significant internal restructuring.
The court’s decision was determining a mutuality of obligation at play with Domino’s and their workers: "an ongoing reciprocal commitment extending into the future to provide and perform work on the part of the employer and employee respectively.” This means that workers, when locked into a specific schedule with the employer, should likely be classified as employees.
This was followed by five questions to clearly determine a worker’s employment status:
Is the worker getting paid for their work under the contract?
If yes, is the worker agreeing to work themselves, rather than through someone else?
Does the employer have enough say over what the worker does to make it look like an employment relationship?
If the answer to all of the above is yes, then the company needs to look at the contract and the actual work situation to determine if an employee contract is required, or a different type of contract.
Lastly, they need to check if there are any special laws that might change or add to any of these points.
As this was a major case in defining what makes an employee in Ireland, this will likely spur further legislation, with the Revenue department set to issue detailed guidance on the implications.
Either way, expect stronger fines for companies who do not classify their workers correctly. The consequences could be crippling.
What penalties might a company face?
For now, companies that misclassify their workers might incur fines of up to €250,000 – like when the Department of Tourism and Office of the Ombudsman for Children were hit with fines worth over €200,000 for misclassifying workers as self-employed in 2022. The Revenue department’s recently launched Employment Status Investigation Unit has reviewed over 500 employers since 2019, identifying arrears of over €800,000. Such penalties might be steep enough to impede expansion into Ireland altogether.
And classifying workers is just the beginning, as hiring employees comes with a number of compliance requirements. Statutory benefits in Ireland include pension plans, paid sick leave, paid annual leave of a minimum of 20 working days per year, and one of the most generous maternity leave policies in the EU, at 26 weeks.
The cost of not following these stipulations can also be steep. The Irish government has recently introduced new fines for breaches of employment compliance practices – including those around redundancy and failure to provide terms of employment – and have issued fines of up to €2000 per instance.
Beyond the financial risk, misclassifying workers could lead to significant reputational damage both inside and beyond your company. Internally, an overreliance on contractual labor could harm team morale, creating an environment of short-term gains at the cost of overall growth. Employees in this environment might not feel part of a wider team or that their work contributes to that growth.
Externally, companies risk significant reputational damage if they’ve run afoul of local tax and employment compliance laws, making it harder to attract new talent in the future. In Ireland, which faces some of the highest talent shortages in the world at 81%, that’s a cost few companies can afford.
What’s the easiest way to avoid such misclassification penalties?
To avoid jeopardizing growth through misclassification, employment compliance needs to be one of the key concerns companies consider while expanding into new markets. As recent legal transformations in Ireland show, however, achieving such compliance is not only difficult – it’s constantly evolving, too.
Partnering with Atlas can help to minimize many of these hurdles. Thanks to our platform, which provides up-to-date insight across over 160 countries, you’ll be able to stay informed about local laws and customs in Ireland and all other global countries you’re based in.
inDrive, a rideshare app that had tested new markets with a contractor-first approach, faced the challenging task of trying to distinguish between employees and contractors while reclassifying many initial contractors to maintain global compliance. Partnering with Atlas allowed them to achieve their desired balance of contractors and employees. Atlas gave inDrive the tools to fine-tune employee-contractor classification and the operational precision to quickly reclassify employees. This resulted in a more dynamic workforce that allowed them to efficiently grow globally.
When building such a dynamic global workforce in your company, it’s good to remember that, between contractors and employees, the biggest benefits employees bring are in the long term – as employees have the opportunity to build the company with you. Rather than merely serving a purpose in the early stages of global expansion, they’ll become committed workers that help you achieve real and lasting growth.
Think of Atlas in the same way: a partner that will grow with you around the world.