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Employee or Subcontractor? It depends who is in the driving seat

29 March 2021

With Uber in the headlines over failing to provide workers’ rights to drivers, Fiona Chandler from Small Business Payroll, a payroll specialist for small Irish businesses, breaks down the difference between an employee and a subcontractor.

contractor smiling, standing behind van with back doors open

The gig economy has been hit hard by Covid-19. Contract workers who had previously enjoyed the flexibility and higher rates of working for themselves, suddenly felt the full force of the job insecurity that comes hand in hand with working project to project. Without company benefits or any government assistance afforded to employees, many were left without a lifeboat when the economy came screeching to a halt.

The lines between employee and subcontractor are becoming increasingly blurred, but the distinction is increasingly important in the backdrop of the pandemic. Just last month, Uber lost a Supreme Court battle in the UK after they claimed their drivers were self-employed and therefore not entitled to holiday pay, minimum wage and other employee benefits. The ride-hailing app has lost similar legal battles in other countries, including in the USA.

Who is really in the driving seat?

The UK Supreme court took into account several factors in its ruling, including the fact that because Uber set the fare and contract terms, that they dictated how much drivers could earn. It also took into account the fact that drivers could be penalised for rejecting too many fares and that Uber monitors drivers’ star ratings and can terminate the working relationship if a star rating doesn’t improve after warnings.

The ruling could have implications for other gig economy workers including couriers and delivery drivers. The legal argument centres around the amount of control a company exercises over an individual – and whether that control should come with a responsibility to look after their wellbeing through company benefits.

Which makes more sense?

As the co-owner of Small Business Payroll, a payroll company based in Louth, I field questions every day from small business owners seeking clarity on the tax status of employees versus subcontractors – and on which one makes more financial sense for their business. One of the things many business owners find most surprising is that transitioning a contractor to employee status does not have to be the financial minefield that many imagine. You can outsource your payroll obligations to a specialist, such as Small Business Payroll. For a small annual fee, we do all the paperwork, ensure you meet all your Revenue obligations and run a weekly or monthly payroll.

Here are some key points to bear in mind:

Contractors’ flexibility comes at a price

Hiring contractors can offer more flexibility when scaling up and down your workforce as demand requires without flouting employment law. You are not obliged to pay PRSI for a contractor or offer company benefits. However, that flexibility comes with a price: contractors often charge higher rates than their full-time equivalent.

Employees can offer loyalty

Contractors are often high paid workers who work on a project basis and as such have no long-term obligation or financial interest in your company once their bill is settled. If you are a small business owner, it can pay to take on employees who are loyal to your company and are passionate about helping you build your business. You can also help shape the skills training those employees receive.

You may have to compete for a contractor’s times

Contractors can move easily between companies and work on a variety of projects at once. You may have to wait, pre-book or join a waiting list for an in-demand contractor. If you have them on their books as an employee, they are obliged to turn up for set hours.

You have to pay PRSI for employees

By hiring contractors over employees, you can avoid PRSI, but self-employed contractors often tag on a hefty premium to compensate for the lack of employee benefits – such as entitlement to sick pay, an employee perk that’s taken centre stage since Covid-19.

Still unsure of the difference?

An individual should be considered an employee and not a contractor if they have a set number of hours that they must work; are paid an hourly, monthly or annual rate and you, as the employers, decides what work they do. You should also consider them an employee if the contract is open-ended and they have a company email address, uniform or company car or van.

A subcontractor on the other hand, can choose what hours they work, can quote for the contract, work for other businesses, make decisions on how the work is done, can hire people to assist them, provide their own tools, vans, vehicles etc and their contract is for a fixed period.

Considering taking on employees or adding someone to your books? Small Business Payroll offer affordable payroll packages starting from €275 a year.