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The Employee and The Subcontractor


The Employee and The Subcontractor 

A worrying trend has been noticed among enterprise help centres and start up advice professionals, which help sole traders establish businesses.  This trend relates to large scale companies are ending permanent contracts with their employees, only to subcontract the work back to the former employee. In a lot of these cases, such employees are often only semi-skilled or not skilled at all (maintenance, cleaning etc). Such practice flies in the face of workers’ rights but is extremely difficult to police and is broadly speaking legal.  Enterprise officers around the country are encountering more and more former employees who are setting up on their own business, in order to pursue their former contracted employment.

In this article, I would like to outline why businesses partake in such practices and why it harms us all as a society when they do.

Before, I begin I would like to define the difference between being an employee of company and a person who is subcontracted to provide a company a service.

The Irish Congress of Trade Unions defines both as follows:

A Contract Employee

“A contract of service is where there is a continuous relationship between the employer and employee. The employer pays the employee a wage, is vicariously liable for the actions of employees and has a degree of control over the employee in terms of the hours worked, deductions made on salary and exclusivity of the service of the employee.”

A SubContractor

“In the case of a contract for service, it is generally a once-off relationship which terminates on the completion of specified activities. This role is usually that of an independent contractor. The employer generally pays for the completion of the work in a lump sum, is usually not liable for the action of independent contractors and has less control or responsibility in terms of hours worked and the provision of equipment.”

From an employer’s perspective hiring a subcontractor over an employee has huge benefits. Subcontracting work usually means lower hourly rates for the job undertaken. There is no minimum wage requirement and a subcontractor has no opportunity for collective bargaining or union representation and has no permanency of contract. What this essentially means is if the subcontractor is too expensive then they are easily replaced by another one who will do it for less.

An employee is also afforded greater protection under Irish law. The State insures the employer cannot unfairly dismiss an employee (a subcontractor’s contract can be terminated after payment for services rendered). The State, also insures that the employer pays employee’s sick pay, paternity/maternity pay, holiday pay and onsite insurance.  A business hiring a subcontractor does not have to worry about any of these issues, only to pay the subcontractor on completion of the work, everything else is on the subcontractor’s head.

In addition, an employer is responsible for an employee’s tax payment under the PAYE system. A subcontractor is responsible for their own tax payment through their own self assessment. An employer is legally obliged to pay a proportion of their employees PRSI (social insurance), though a subcontractor pays their own PRSI, they are not directly entitled to public social insurance and receive no payment towards it on behalf of those employ their services.

This issue seems to have become more prevalent since the recession.  Employees, who are often semi-skilled or not skilled at all are released from employment to be subcontracted back to the company.  The problem here is that because the nature of their work is semi-skilled or non skilled (cleaning etc.). Subcontractors in such a position are unlikely to find other business outside of their original employer.  In addition, their employer may demand the same hours they filled as an employee. Therefore, the newly made subcontractors are ipso facto, employees without rights.

Organisations such as NERA (National Employment Rights Authority) were established to combat this problem but there are genuine issues with defining the difference between an employee who was laid off for this purpose and a genuine subcontractor, who simply are in the proposed business.  In addition, NERA cannot ask an employee their status directly but must work through the Revenue or Dept of Social Protection to assess the situation.

When asked about the situation by Paul Murphy TD, Minister for Jobs and Enterprise Richard Burton had did this to say

“The National Employment Rights Authority (NERA) has a team of inspectors, and in 2013 NERA carried out over 5,500 inspections. Where NERA encounter the sub-contractor model, the question may arise as to whether individuals are employees or self-employed. NERA Inspectors are not in a position to make a final determination regarding employment status. Rather, this is a matter for both the Department of Social Protection (DSP) and the Revenue Commissioners. Where NERA inspectors encounter situations in which there is a question over the employment status of an individual, they refer the matter to the relevant authority. Where either the Department of Social Protection or the Revenue Commissioners makes a determination on these issues NERA, in accordance with the Code of Practice for Determining Employment or Self-Employment Status of Individuals will generally accept their decisions on the issue. Finally, the matter can also be determined by the courts.”

The above suggests a lengthy and perhaps, a little unclear, process combined with the subcontractor’s most likely unwillingness to complain about their situation (for fear of losing the contract with the offending company) makes it unlikely, to be sufficient oversight to police the problem.

The practice ultimately, undermines the unions’ ability to accurately represent employees’ rights.  It brings job security into question for many and drives down labour wages, as well as circumventing the minimum wage.  The discussion as to how we legislate for this phenomena needs to begin.

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