State agencies to investigate bogus use of contractors

State agencies are stepping up investigations into companies who employ workers as self-employed contractors on a bogus basis to cut their overheads.

The use of contractors in the IT, pharmaceutical, health and engineering sectors has been promoted by both employers and recruitment firms.

While much of this is done on a legitimate basis, some employers are reportedly encouraging staff to set up as contractors or “personal service companies”, even in cases where the workers are under the control and direction of a single firm.

While individuals can avoid tax such as PRSI and push inflated expenses through specially incorporated companies, it also means companies can pay less in the form of social insurance.

Tax liabilities

Last year, an investigation by the Revenue Commissioners of at least 400 contractors, in areas such as IT and management consultancy, found tax liabilities in 80 per cent of cases, yielding about €10 million.

Revenue is understood to be expanding its investigations into other sections of the economy where contractors are concentrated.

Tánaiste Joan Burton has expressed concern at the practice, which she said was depriving the exchequer of tax and leaving workers in potentially vulnerable positions. "This is an area that needs to be examined in greater depth," she said. "The Revenue has uncovered a significant amount in relation to contractors; the Department of Social Protection as well as Jobs and Enterprise should also move to examine it."

The Scope section of the Department of Social Protection plays a key role in determining the insurability of employment in accordance with the law. It is understood to have also uncovered evidence of the practice.

Benefits

An individual’s classification for social insurance purposes is important as it affects the rate of PRSI they pay on their salary or income. This in turn affects the social insurance benefits to which they are entitled.

Where an individual is classified as an employee, PRSI is payable on their earnings by both the employee and their employer.

This typically entitles the employee to a full range of social insurance benefits, including short-term benefits in respect of illness, unemployment and maternity benefit.

Where an individual is classified as self-employed, they pay a lesser rate of PRSI which provides access to a much smaller number of short-term benefits.