Compliantly Engage Contractors in Ireland

Any business hiring in Ireland should understand the important legal distinction between who classifies as an independent contractor and who can be hired as an employee. Fines or penalties may be issued to businesses who are hiring contractors under the guise of employment. 

In Ireland, merely describing an individual as an independent contractor has no legal significance. Instead, various factors are taken into account to determine the true legal status of the individual. Therefore, understanding the distinctions between employees and independent contractors is critical to compliantly engaging workers in Ireland. Instances of ‘false self-employment,’ as defined under The Competition (Amendment) Act 2017, may lead to the worker losing both employment rights and social welfare benefits. 

It is important to work with a partner like Worksuite to ensure that you have an engagement framework that properly classifies freelancers able to work as independent contractors. Alternatively, Worksuite can automatically alert you when freelance talent must be engaged directly as employees, or contractors on payroll.

In Ireland, five main factors are considered when determining if a worker is an employee or an independent contractor. These were outlined in a 2021 Code of Practice developed by The Office of the Revenue Commissioners and the Department of Social, Community and Family Affairs. They are:

1. Mutuality of obligation. Is there an obligation for either the company to provide work, or for the worker to accept it?
2. Substitution. Can the worker task someone else with completing the work? And if so, who pays the new worker?
3. The enterprise test. Is the worker either able to profit, through their own efficiency, or accrue a loss, through poor service or practice, while completing the work?
4. Integration. Is the worker embedded in the business, or simply providing an external service that is peripheral to the organization?
5. Control. Can the person or business paying for the work decide how, where and when the work should be completed?

Independent contractors in Ireland work under one of two main categories: a self-employed freelancer (either through a limited company or as a sole trader – see section 4.1), or through a third-party umbrella company (either PAYE or Director – see section 4.2).

• Self-employed freelancer: Independent contractors can work as freelancers without establishing their own company, or they can establish a limited company through which they offer their services. In either instance, the contractor issues an invoice for the work done and the client pays the contractor in full. No deductions are made at source.
• Operating through an umbrella company: Independent contractors can work through a third-party umbrella company. These arrangements normally ease the financial and legal administrative burden faced by a contractor. 

There are two primary engagement models for working with independent contractors in Ireland:

• Direct engagement of the independent contractor as self-employed or registered via their own limited company.
• Contract for service: Under these agreements, a contractor commits to completing a specified job for an agreed fee. The contractor has control over how, when and where the work is completed. They may also subcontract the work to other people. Under a contract for service, the contractor also provides any materials necessary to complete the job and is able, through their own entrepreneurial talents, to profit from the work.
• Third party: Two options are popular for independent contractors in Ireland.
• Umbrella company (PAYE): Under this model, which is ideal for short-term contracts or where work permits or visas do not allow for being self-employed, the contractor ‘joins’ a PAYE umbrella company. The contractors tax and PRSI contributions are deducted at source, freeing the contractor from the administrative burden of operating their own company. However, contractors using a PAYE umbrella company will pay both the employee and employer PRSI contributions.
• Umbrella company (director): Under this model, the contractor enjoys the same benefits of running a limited company, but has to endure none of the hassle and costs of actually setting up and running a limited company. The umbrella company completes all of the contractor’s invoicing and tax affairs for a fixed monthly fee. This set-up is usually used by contractors working on agreements that last six months or more.

Companies hiring independent contractors in Ireland should avoid making payments directly through their payroll system. The contract for service should stipulate agreed fees, payment methods and payment dates.

Independent contractors hired via direct engagement are not paid as part of an Irish company’s payroll. Their fees are paid without any deductions at source for tax or other benefits.

Independent contractors in Ireland pay class S of PRSI at a rate of 4%. Contractors earning more than €100,000 per year are obliged to pay a universal social charge surcharge of 3%. Contractors are not eligible for a range of benefits, including invalidity benefit and illness benefit.

Independent contractors hired through an umbrella company may be liable for extra PRSI payments at a rate of 10.95%. In return, they are able to enjoy state benefits.