This article is for Irish business owners and hiring managers who need to decide whether to engage someone as an employee or contractor.
If you're unsure about the legal differences, worried about misclassification penalties, or wondering how Revenue determines employment status, this guide covers the key tests that determine classification, the tax and legal consequences of getting it wrong, and when each arrangement is appropriate.
Key Takeaways
• Control is the most important factor: if you direct how, when, and where work is done, the person is legally an employee.
• Misclassifying employees as contractors can result in years of back-taxes, employer PRSI at 11.05%, penalties, and retroactive employment claims.
• Employees receive minimum wage (€12.70/hour), four weeks annual leave, and unfair dismissal protection after 12 months of service.
• Revenue examines the actual working relationship, not contract labels—having a company or invoicing doesn't make someone a contractor.
• When uncertain about classification, default to employee status as the costs of misclassification far exceed proper employment costs.
Can I just choose to classify my workers as contractors instead of employees to save money?
No, you cannot simply choose the classification that suits you. The actual working relationship determines whether someone is an employee or contractor, regardless of what you call them or what the contract says. Misclassifying employees as contractors to avoid obligations is illegal and can result in years of back-taxes, penalties, and employment claims.
What's the main factor that determines if someone is an employee or contractor?
Control is the most important factor Revenue considers. If you tell someone what to do, when, where, and how to do their work, they're likely an employee. If they just deliver defined results using their own methods and schedule, they're likely a contractor.
If my contractor has their own limited company and invoices me, does that make them a legitimate contractor?
Not necessarily. Revenue looks at the actual working relationship, not labels or paperwork. Even if someone has their own company and sends invoices, they can still be classified as an employee if the reality of the relationship shows control, integration, and lack of independence.
What employment rights do contractors get compared to employees?
Contractors get none of the statutory employment rights that employees receive. Employees are entitled to minimum wage (€12.70/hour), four weeks annual leave, public holidays, maternity/paternity leave, unfair dismissal protection after 12 months, and redundancy payments after two years, while contractors have no such protections.
What happens if Revenue decides I've misclassified employees as contractors?
Revenue can reassess your tax position and demand back-taxes plus penalties for all the PAYE, USC, and PRSI you should have deducted. The misclassified workers can also claim employment rights retroactively, including holiday pay and other entitlements. The costs can be enormous, potentially covering years of unpaid obligations.
Can a contractor work exclusively for my company?
While technically possible, exclusivity is a strong indicator of employment rather than contracting. If you prevent someone from working for other clients, Revenue and courts will likely view this as an employment relationship. Genuine contractors typically work for multiple clients simultaneously.
What are the red flags that Revenue watches for with contractor arrangements?
Revenue scrutinizes contractors who work for you for years, work exclusively for you, use your office and equipment, have employee-like job titles on your website, or have payment structures identical to employees. Multiple "contractors" doing identical roles is also a major red flag.
When should I definitely use an employment contract instead of a service agreement?
You must use employment for full-time ongoing positions, work requiring daily direction and control, exclusive arrangements where the person can't work for others, roles integral to your business operations, and when you provide all equipment and materials. Don't try to dress up permanent positions as contracting arrangements.
What should I do if I'm unsure whether to classify someone as an employee or contractor?
When in doubt, classify as an employee. The costs of misclassification far exceed the costs of proper employment, and Revenue has a Code of Practice on employment status you can consult. Get professional advice before engaging someone in borderline situations rather than gambling on the wrong classification.
