By Brian Keegan
You would think it would be obvious, whether a person is an employee or self-employed. So why should the employment minister be running a campaign to raise awareness about false self-employment in Ireland?
The key reason is PRSI. Whether you’re self-employed or an employee, for most people, 4% of their earnings goes in PRSI — a pay-related social insurance which determines what kind of social welfare benefits you can receive.
But employers pay 10.85% additional PRSI for employees, which is not payable in the case of a self-employed worker. Put that into cash terms, for an employee on a salary of €45,000, the employer must pay PRSI of €4,882 adding up to a total cost for the employer of nearly €50,000.
PRSI differs from tax in that you get something back directly related to your contribution — the clue being in the “pay related social” bit.
While many see PRSI as yet another government-imposed burden many people felt the absence of PRSI benefits during the downturn when small businesses went bust and their owners had no entitlement to jobseekers’ benefit.
Employees and their employers pay PRSI and that gives them entitlements to jobseekers’ benefit, along with other State benefits such as illness benefit and occupational injuries benefit. The self-employed don’t have these entitlements.
That’s because the self-employed pay PRSI at 4%, whereas employers pay up to 10.85% on top of what their employees pay in PRSI. The logic is simple.
The large amount of PRSI which employers have to pay on behalf of their employees can be a reason for employers preferring to take on self-employed contractors rather than hiring employed staff directly.
There are other reasons too which are not related to PRSI rules but to employment law, for instance, entitlement to holiday pay. Despite these considerations, there is no fixed definition of when someone is employed or self-employed.
Instead, the authorities look to the precedents established in previous cases for guidance where it is unclear whether or not someone is employed or self-employed.
The guiding principles for determining employment or self-employment for PRSI purposes were set out over 20 years ago in a case which involved supermarket demonstrators — the people in the aisles who hand out free samples to promote a particular product or brand.
Some of them had work contracts which specifically said they were not employees, but the judges (and this one went all the way to the Supreme Court) maintained that whatever their contracts said, it was not enough.
Instead, you have to take account of how independent the workers were, whether they could appoint substitutes, whether they used their own tools and clothing, and how their performance impacted on how much they might be paid.
There has to be an element of commercial risk for someone to be truly self-employed.
While self-employment doesn’t suit everyone, it has many advantages. These include greater flexibility over working time, opportunities for increasing income and for many, the incomparable benefit of being your own boss.
This is where the current Government campaign falls down, with its emphasis on “false self-employment”. It misses the potential of true self-employment and the contribution of the sector to the economy and society in general.
It seems the current campaign could be motivated by civil service concerns over control and the collection of PRSI.
If so, it would be in the spirit of an earlier study on problems with the application of PRSI to the self-employed, which suggested that people should pay more PRSI.
But Minister Regina Doherty was quick to dismiss those findings in February, pointing out she was more interested in extending rights to self-employed people.
Vulnerable workers need PRSI and employment law protections.
That should not be at the expense of promoting entrepreneurship, which is driven most often by the true self-employed.
Brian Keegan is director of public policy and taxation at Chartered Accountants Ireland