Contracting vs Employment: Which Model Fits

Quick Answer

Most employers treat this as a choice between two options. There are three.

• Direct employment. You are the employer. You carry PAYE, PRSI, holiday pay, sick leave and auto-enrolment.

• Genuine contracting. A self-employed person or limited company providing a service. Lower admin, but only lawful if the relationship is genuinely one of service.

• Agency staff. The agency is the employer and carries the statutory obligations. You get flexibility without the classification risk.

  
  

The critical point: you do not decide which one applies. The facts do. Since the Supreme Court's Karshan judgment, Revenue, the Department of Social Protection and the WRC all apply a five-step test that looks at how the work is actually carried out, not what the contract says.

The question usually arrives as a cost question. Someone works out that a contractor at a day rate looks cheaper than an employee once PRSI, pension and holiday accrual are added up, and asks whether the role could be engaged that way instead.

It is a reasonable question with a more complicated answer than it used to have. Here is where the line actually sits in 2026.

Three models, not two

Framing this as employee versus contractor misses the option that suits most of the situations it gets asked about.

Direct employment means the person is on your payroll. You deduct PAYE, USC and employee PRSI, pay employer PRSI, provide statutory leave and sick pay, and contribute to pension auto-enrolment. They accrue employment rights and unfair dismissal protection.

Genuine contracting means engaging a business rather than a person. A self-employed individual, a limited company, or someone working through an umbrella arrangement. They invoice you, handle their own tax, and carry their own insurance. You are buying a service, not directing a worker.

Agency staff sit between the two and are frequently the right answer when neither of the others fits. The agency employs the person, runs payroll, and carries the statutory obligations. You direct the day to day work and pay a charge rate. The classification question does not arise, because there is no ambiguity about who the employer is.

That third route is often what an employer actually wants when they ask about contracting. The underlying need is usually flexibility without permanent headcount, and temporary recruitment delivers exactly that without putting the business anywhere near a misclassification argument.

The test that decides it

In 2023 the Supreme Court delivered its judgment in the Karshan case, which concerned whether delivery drivers were employees or contractors. It replaced decades of overlapping and sometimes contradictory tests with a single structured framework.

That framework now sits at the centre of the Code of Practice on Determining Employment Status, published jointly by the Department of Social Protection, Revenue and the WRC.

The five questions, in order:

1. Is there an exchange of wage or other remuneration for work?

2. Is the worker providing their own services, rather than those of a third party?

3. Does the business exercise sufficient control over the worker?

4. Do the terms of the contract, read against how the work is actually done, point to employment?

5. Is there anything in the relevant legislation that requires the answer to be adjusted?

The first three are filter questions. If the answer to any of them is no, the relationship is not employment and the analysis stops there. If all three are yes, questions four and five decide it.

Question three is where most arrangements come apart. If you set the hours, direct how the work is done, provide the equipment, and the person cannot send a substitute, you are exercising control in the way an employer does.

The contract does not decide it

This is the single most expensive misunderstanding in the area.

The Code is explicit that decision makers look at the formal contract, then at how the work is actually carried out, and assess the relationship against reality. A written agreement describing someone as an independent contractor carries very little weight if the day to day arrangement looks like employment.

The practical version: if the person works your hours, at your premises, under your supervision, using your equipment, with no genuine right of substitution and no real risk of loss, the label on the contract will not save you.

Two facts worth knowing if you have come from the UK market. Ireland has no IR35-equivalent regime, so there is no client-led status assessment process to complete. And the Code is described as a living document, updated as case law and the labour market move, so a determination made against an older version is not a permanent answer.

Three bodies, three possible answers

This one surprises people, and it is the strongest argument for getting the model right at the outset.

Revenue, the Department of Social Protection and the WRC all apply the same five-step test. But their decisions are not binding on each other, and because each operates under a different legislative framework, the same set of facts can in principle produce different determinations from each.

In practice that means misclassification exposure runs across several fronts at once:

• Tax. Unpaid PAYE and USC, with interest and penalties

• Social insurance. Retrospective employer PRSI liability

• Employment rights. A reclassified worker may bring statutory claims covering the whole period

• Criminal. Deliberate misclassification is an offence, not merely a tax adjustment

Revenue ran a once-off self-correction window for employers who had made genuine classification errors, which closed on 30 January 2026. That facility is gone. The Employment Law Review Group has also been examining employment status as part of its current programme, so further change is likely.

If your existing contractor arrangements have not been reviewed since Karshan, they are being assessed against a test that did not exist when they were written.

What each model actually costs

The cost comparison is real, but it is narrower than it first appears.

Employing someone directly carries employer PRSI at roughly 11% above the weekly threshold following the October increases, pension auto-enrolment at 1.5% of gross earnings during the current phase, holiday pay accruing at 8% of hours worked, ten public holidays, and five days of statutory sick pay. Our breakdown of what it costs to hire staff in Ireland sets those out in full.

Engaging a genuine contractor removes most of that from your books, which is why the headline looks attractive. But a contractor day rate is priced to absorb those same costs plus the gaps between contracts, so the real gap is smaller than a naive comparison suggests. Where a contractor works through a PAYE umbrella, employer PRSI is funded out of the assignment rate rather than avoided.

Agency staff carry the statutory costs inside the charge rate. The wage, employer PRSI, holiday accrual, sick pay provision and auto-enrolment all sit with the agency, along with the compliance responsibility.

The honest summary is that the statutory cost of employing someone in Ireland does not disappear by changing the label. It moves. What genuinely differs between the models is who carries the administration and who carries the risk.

When each one fits

Direct employment suits roles that are ongoing, that hold institutional knowledge, that manage people or own client relationships, or where you need the person to be available on your terms. If you want to control how the work is done, that is employment, and structuring it otherwise is the problem rather than the solution. Our guide to how permanent recruitment works covers the process.

Genuine contracting suits defined pieces of work with a specific deliverable, specialist expertise you need occasionally rather than continuously, and situations where the person genuinely runs their own business, serves other clients, sets their own methods and carries real financial risk. It works best where you are buying an outcome rather than someone's time.

Agency staff suit seasonal peaks, absence cover, project surges, and the period while a permanent decision is being made properly. It also works as a trial in both directions before anyone commits.

Before you engage anyone as a contractor

A short review that costs nothing and prevents a great deal.

• Run the five-step test honestly against how the work will actually be done, not how the contract describes it

• Ask whether the person genuinely serves other clients

• Check whether there is a real right of substitution, and whether it has ever been used

• Establish who provides the equipment and who bears the cost of correcting defective work

• Confirm whether they set their own hours and methods

• Ask whether they carry their own insurance and their own risk of loss

• Document the reasoning at the outset, while the facts are fresh

If several of those point towards employment, the arrangement is employment. The two lawful routes at that point are to employ the person directly or to engage them through an agency, where someone is the employer and the position is unambiguous.

For a review of existing arrangements, or help getting the documentation right, our HR services and employer pages set out what we can support.

Key Takeaways

• There are three models, not two: direct employment, genuine contracting, and agency staff.

• The facts decide the status, not the contract. A written agreement calling someone a contractor carries little weight against the reality.

• The Karshan five-step test now governs status, and sits at the centre of the official Code of Practice.

• Control is where most arrangements fail. Set the hours, direct the method and supply the equipment, and it looks like employment.

• Ireland has no IR35 equivalent. UK-based guidance describes a different regime.

• Revenue, the DSP and the WRC apply the same test, but their decisions do not bind each other.

• Misclassification exposure spans tax, PRSI, employment rights claims and criminal liability.

• Deliberate misclassification is a criminal offence, not just a tax adjustment.

• Revenue's self-correction window closed on 30 January 2026. That facility is gone.

• Statutory cost does not disappear by changing the label. It moves.

• The deciding question: are you buying an outcome, or someone's time under your direction?

The model is not a preference. It is a description of a relationship, and the relationship is assessed on what actually happens rather than what the paperwork says.

Since Karshan there is a single structured test, applied by three separate bodies whose decisions do not bind each other. That combination means an arrangement can be challenged from more than one direction, and the retrospective liability reaches back over the whole engagement.

Where the work is genuinely a service with a defined outcome and real independence, contracting is legitimate and straightforward. Where you want someone working your hours under your direction, that is employment, and the only question left is whether the employer is you or an agency.

If you are reaching for a contractor mainly to avoid permanent headcount, that is worth naming out loud, because it usually points at flexible resourcing rather than contracting.

FAQs

Total Solutions is a licensed recruitment agency based in Lucan, Co. Dublin, supplying temporary, permanent and contract staff across construction, warehousing, hospitality and office support.

If you are weighing up the right model for a role, talk to us about the brief. More employer guidance in the Insight Hub.