2012 Number 1 Who s The Boss? Recent Developments in the PRSI Classification of Directors 47 Who s The Boss? Recent Developments in the PRSI Classification of Directors Daragh O Shaughnessy AITI Introduction The issue of PRSI classification is closely linked to that of determining whether a person is employed or self-employed. In the absence of clear statutory definitions of what constitutes an employee, this question is often difficult to resolve, as it is necessary to review a large body of case law to extrapolate what factors are most relevant. Recent judgments in the High Court have provided some clarification on the most relevant factors to be considered (see Minister for Agriculture and Food v Barry and Others [2008] IEHC 216 and Brightwater Selection (Ireland) Limited v Minister for Social and Family Affairs (unreported, HC 27 July 2011)). While the recent guidance on this matter provided by the Irish courts is welcome, the PRSI classification of shareholding directors carries additional complexities due to the potential for a director and shareholder to have more than one type of relationship with the company for which he or she works. The impact of these relationships on a director s employment status had not been specifically addressed by an Irish court until the recent judgment of Laffoy J in the case of Neenan Travel Limited v Minister for Social and Family Affairs [2011] IEHC 458. The timing of this judgment will be relevant to the deliberations being undertaken in the SCOPE section of the Department of Social Protection. As many practitioners may be aware, all formal SCOPE decisions on the PRSI classification of shareholding directors have been suspended for several months now, with an indication from the SCOPE section that the long-standing practice of treating majority shareholders and certain other controlling directors as falling within PRSI Class S is under review. It is understood that, based on the case law guidance from other jurisdictions, it is possible that in the future even directors with controlling shareholdings may be liable for PRSI under Class A as employees of the company.
48 Who s The Boss? Recent Developments in the PRSI Classification of Directors The judgment in Neenan provides guidance from an Irish superior court on this very issue that should inform the ultimate decision by SCOPE. The Neenan Case Background The Neenan case concerned the status of Mr Tom Leech, a director and minority shareholder in the appellant company, Neenan Travel Limited. In December 2003 Mr Leech ended his engagement with the company and sold his shares to another shareholder for a nominal sum. He also received what was termed an ex gratia payment, part of which was described as being the statutory payment. The company made a claim for a rebate of an element of the statutory redundancy payment made to Mr Leech. The Department of Enterprise, Trade and Employment requested that the SCOPE section of the Department of Social and Family Affairs determine whether Mr Leech was indeed in an insurable employment at the date of termination. The Department of Social and Family Affairs carried out an assessment of Mr Leech s status and determined that he was in insurable employment on the basis that he was employed under a contract of service. On appeal, the Social Welfare Appeals Officer upheld this decision on the basis that, while Mr Leech had autonomy in relation to the day-to-day business of the company, his minority shareholding was a fact worth emphasising, concluding that his employment was more consistent with that of a contract of service than a contract for services. The company requested that this decision be reviewed by the Chief Appeals Officer, who concurred with the Appeals Officer, whom he did not find was mistaken in relation to the law or the facts, thus leading to an appeal to the High Court under s327 of the Social Welfare (Consolidation) Act 2005, which allows an appeal on any question of law. Primary Facts Neenan Travel Limited was a private limited company incorporated in 1968. In 1972 Mr Leech joined the company as an employee. The company paid Class A PRSI contributions in respect of his employment until 5 April 1992 and Class S contributions from 6 April 1992 until the date of the termination of his employment. Mr Leech had acquired 16.7% of the shares in the company in 1988, and it is understood that he became a director of the company at that time. Mr Leech described his role to the Department of Social and Family Affairs as that of Sales Director. He advised that he was paid a monthly salary determined by the company, that he worked 40 hours per week and that he was supplied with a company car. He was paid holiday leave and sick leave, and his expenses were refunded. He did not receive directors fees, share dividends or drawings. Although it is understood that a standard contract was drawn up for his engagement that remained unsigned, he indicated that he could have been dismissed as per the contract for unsatisfactory performance. Grounds for Appeal The company appealed the decision of the Appeals Officer on several different grounds. However, as the court considered the matter settled by addressing the primary question in the first ground below, I outline only the other grounds where the response by the court provides the most relevant guidance for the future. The company appealed the decision of the Appeals Officer on the basis that the officer had erred in law in the following ways, inter alia: in determining that Mr Leech was engaged in a contract of service; in failing to consider properly his significant shareholding and level of autonomy; in failing to apply the appropriate tests set out by the Employment Status Group in its Code of Practice for Determining Employment or Self-Employment Status of Individuals or to consider the guidelines published by the Department of Social Protection in its leaflet Scope Insurability of Employment ; in acting ultra vires by making a determination in the absence of defining authority for the contractual status of such shareholding directors and in endorsing the imposition of a charge to PRSI in the absence of a definitive charging section; in discriminating against the company by not applying the same treatment to shareholding directors as would be given to partners in an analogous business arrangement and in failing to recognise the company as being run as a quasi-partnership
2012 Number 1 Who s The Boss? Recent Developments in the PRSI Classification of Directors 49 Court s Analysis of Grounds for Appeal Vires of Appeals Officer and lack of definitive charging section The court first addressed the grounds for appeal that effectively doubted the jurisdiction of the Appeals Officer in making the determination in the case. While recognising the principle that a strict approach should be used in interpreting taxation statutes, the court indicated that the Social Welfare Acts provide a definition of an insurable employment as one under a contract of service and, although no statutory definition of contract of service is given, the considerable body of jurisprudence regarding what constitutes such a contract means that there is no lacuna in the law. It would therefore seem that, in the opinion of the court, the combination of the statute and precedent was sufficient for the charging section to be considered definitive. Core issue contract of service Laffoy J identified the core issue in the appeal as whether or not the Appeals Officer was correct in law and on the facts in finding that Mr Leech was employed on a contract of service between 1992 and 2003 for the purposes of the Social Welfare Acts. In this regard, the court referred to the decision of the Supreme Court in Henry Denny and Sons (Ireland) Ltd v Minister for Social Welfare [1998] 1 IR 34 as the leading Irish authority on the question of what constitutes a contract of service in the context of the Social Welfare Acts. The court sought to summarise the principles arising from that decision by quoting the words of Keane CJ in the Denny judgment: It is, accordingly, clear that, while each case must be determined in the light of its particular facts and circumstances, in general a person will be regarded as providing his or her services under a contract of service and not as an independent contractor where he or she is performing those services for another person and not for himself or herself. The degree of control exercised over how the work is to be performed, although a factor to be taken into account, is not decisive. The inference that the person is engaged in business on his or her own account can be more readily drawn where he or she provides the necessary premises or equipment or some other form of investment, where he or she employs others to assist in the business and where the profit which he or she derives from the business is dependent on the efficiency with which it is conducted by him or her. The court stated that these principles had been reiterated by the Supreme Court in Castleisland Cattle Breeding Society Ltd v Minister for Social and Family Affairs [2004] 4 IR 150. The court also noted that it had not been referred to any Irish authority in which the social insurance, employment and redundancy status of an individual who was both shareholder and director was considered and therefore sought to derive guidance from decisions of the UK courts in the cases of Secretary of State v Bottrill [2000] 1 All ER 915 and Fleming v Secretary of State for Trade and Industry [1997] IRLR 682. Bottrill Mr Bottrill was the managing director and sole shareholder of a company with one other director. He had a signed contract of employment, setting out his duties, working hours and entitlement to remuneration, holiday and sick pay. He worked the hours indicated and paid tax and National Insurance contributions as if he were an employee. Following the appointment of a receiver due to the company s insolvency, Mr Bottrill was made redundant. He applied to the Secretary of State for a redundancy payment but was refused on the basis that he was not an employee. Lord Woolf MR in the Court of Appeal identified the issue for determination as whether or not a controlling shareholder of a company can also be an employee of that company for the purposes of the relevant employment legislation. Laffoy J noted that the approach taken by the Court of Appeal in the Bottrill case was similar to that taken by the Irish Supreme Court in Denny and quoted the words of Lord Woolf MR from the conclusions reached by the Court of Appeal in noting that there is no: simple and clear test which will determine whether a shareholder or a director is an employee for the purposes of the Act or not... whether or not an employer or an employee relationship exists can only be decided by having regard to all the relevant facts. If an individual has a controlling shareholding that is certainly a fact which is likely to be significant in all situations and in some cases it may prove to be decisive. However, it is only one of the factors which are relevant and certainly it is not to be taken as determinative without considering all the relevant circumstances. Lord Woolf went on to indicate that the issue of control by the company over the shareholder employee is always important but that the relative importance of that control would depend on all of the relevant factors of each case.
50 Who s The Boss? Recent Developments in the PRSI Classification of Directors Fleming The circumstances of Fleming were similar to that in Bottrill, albeit Mr Fleming held 65% of the shares of the company rather than 100%. Again, Laffoy J noted that the position adopted by the court in the Fleming case reflected that of the Irish Supreme Court in Denny, in weighing up all the individual factors that could be considered in favour of and against the proposition that Mr Fleming was an employee. officer or an appeals officer is to apply the law, irrespective of what is contained in the two documents. Discrimination, quasi-partnership and minority shareholder rights The court rejected the grounds for appeal based on company law principles as being of no relevance to the determination made by the Appeals Officer. Application of these principles Laffoy J pointed out that the primary question before the court was whether the Appeals Officer had erred in law in his conclusion regarding the significance of the shareholding and directorship of Mr Leech in determining his employment relationship with the company. In summarising the findings of the Appeals Officer, Laffoy J advised that the essence of what he found was that Mr Leech was performing the services he rendered not for himself but for the company, which was under the control of the majority shareholders. Laffoy J advised that the essence of what [the Appeals Officer] found was that Mr Leech was performing the services he rendered not for himself but for the company, which was under the control of Although Laffoy J considered that this alone was sufficient to find that the Appeals Officer had not erred in law in his conclusion, she also addressed the other specific grounds for appeal. the majority shareholders. Firstly, the court quoted legal academic authority in pointing out that for an owner-managed company to be considered a quasi-partnership company, all directors should have equal shareholdings, which was not the case with the appellant company. Secondly, the recognition of a company as being a quasi-partnership should impact on the rights of the members only in their relationship with each other rather than with the company. Importantly, while rejecting the above grounds in this case, the court recognised the hypothetical possibility that the existence of the type of facts that give rise to the recognition of a corporate quasi-partnership might be relevant in a particular case in determining whether an employer/employee relationship exists between the company and a shareholder worker. Shareholding and autonomy The court found that the Appeals Officer was correct in emphasising that Mr Leech was a minority shareholder and in implicitly differentiating between, on the one hand, day-to-day management control and autonomy and, on the other, control or influence at board level. Employment Status Group Code of Practice and SCOPE guidelines The court found that the Appeals Officer did, in fact, act in accordance with the SCOPE guidelines, which do not explicitly prescribe the classification of executive directors, and that the Appeals Officer did not rely erroneously on the Code of Practice. However, in referring to the Code of Practice and the SCOPE guidelines, Laffoy J stated that while both documents have been prepared on the basis that they reflect the law and the decisions of the courts, the task of a deciding Summary of Court s Conclusions In summarising, the court referred once again to the core issue for determination by the Appeals Officer as being whether or not Mr Leech was employed by the appellant company under a contract of service, and: On the authority of the decision of the Supreme Court in the Henry Denny case, in order to find that Mr Leech was in employment under a contract of service, the Appeals Officer had to find that he performed the services he was contracted to perform for the appellant, and not on his own account. The court pointed out that the fact that Mr Leech was an employee of the company before acquiring his 16.7% shareholding was not in dispute and that the Appeals Officer was correct in law in finding that the acquisition of his shareholding did not change that relationship.
2012 Number 1 Who s The Boss? Recent Developments in the PRSI Classification of Directors 51 The court found that the low level of Mr Leech s shareholding in the of interpretation of the words of Keane CJ in Denny had been criticised company allowed for the ready conclusion that his shareholding and by Edwards J in Minister for Agriculture and Food v Barry and Others directorship did not interfere with his status as an employee under a as due to misguided attempts to divine in the judgment the formulation of a definitive, one size fits all test. Edwards J had indicated contract of service, also stating: in that judgment that the binding element of the Denny judgment However, it has not been necessary, and I have not attempted, was the principle that each case should be judged on its own facts to identify any general principle which would be of assistance and circumstances, rather than the elevation of a single particular in identifying the point at which, or the circumstances in which, test to that of a fundamental arbiter of employment status. The a substantial shareholding and the top management role in a implication from the Neenan judgment would seem to conflict with company may be indicative of the fact that the person in that that position and therefore leaves some confusion regarding the position is acting on his own account and not as an employee of current relative importance of the enterprise test. the company. Each case must be considered on its own facts in accordance with the general principles which the courts have developed, as Keane J stated in the Henry Denny case. would seem to conflict Ramifications of the Decision with that position and The potential for a decision by SCOPE that all directors, regardless of shareholding, could be subject to Class A PRSI would have widespread application to Irish companies, given the prevalence of owner-managed companies in this State. One might assume that the reasoning used by Laffoy J in the Neenan judgment is likely to have an impact on the ultimate policy adopted. The implication from the Neenan judgment therefore leaves some confusion regarding the current relative importance of the enterprise test. The references by Laffoy J to the principle espoused in Denny that each case must be determined in the light of its particular facts and circumstances is therefore important. In taking account of the relevant facts and circumstances, Laffoy J referred to the potential for a substantial shareholding or the existence of a hypothetical quasipartnership company being an influential factor in determining the employment status of a director, therefore indicating that, in principle, such shareholding can be relevant. A second implication in this judgment arises from the apparent weight given by the court to the enterprise test. The enterprise test is the shorthand reference given to the principle described by Keane CJ in the Denny judgment that in general a person will be regarded as providing his or her services under a contract of service and not as an independent contractor where he or she is performing those services for another person and not for himself or herself. In summarising the court s conclusions in Neenan, Laffoy J seemed to imply that the enterprise test was the single fundamental test that could distinguish a contract of service from a contract for services. This type In the aforementioned Barry case, Edwards J had implied that the Employment Status Group had been mistaken in its Code of Practice for Determining the Employment or Self-Employment Status of Individuals in determining that the enterprise test was indeed the fundamental test. While the judgment of Laffoy J would seem to support the position adopted in that Code of Practice, the status and credibility of the Code of Practice itself and the corresponding document provided by SCOPE would seem to be undermined by the court s statement that while both documents have been prepared on the basis that they reflect the law and the decisions of the courts, the task of a deciding officer or an appeals officer is to apply the law, irrespective of what is contained in the two documents. Conclusion On the specific issue of the classification of shareholding directors, it remains to be seen whether this judgment will have a significant bearing on the future approach taken by SCOPE. However, it would appear to provide some justification for preservation of the current practice for PRSI classifications rather than a radical departure based on foreign jurisprudence. On the more general and ongoing issue of what precisely constitutes a contract of service, any judicial guidance is always welcome. However, the judgment in this case potentially causes confusion regarding the appropriate approach to take in light of the recent judgment in Barry and Others, and it is hoped that these decisions can be reconciled sooner rather than later, given the importance of this question to many tax practitioners.