PRSI for Directors – challenging times
Private matters, December 2012
The question of the employment status of directors and in particular shareholder directors has always been a significant issue from both an employment law and a PRSI point of view. For PRSI purposes employment status will determine;
- whether Class A (employed) or Class S (self-employed) PRSI is due, and
- the range of Social Welfare benefits that an individual is entitled to receive
There have been significant developments in this area of late. Firstly the Department of Social Protection (DSP) has undertaken an internal review of their practices in this area. This action was taken as their practices were out of step with recent UK cases in this area, which suggests that the majority of directors should correctly be classified as employees. DSP have also issued instructions that no further rulings on directors PRSI status are to issue, until such time as this review group issues its findings. This had led to a significant build-up of cases awaiting rulings.
Secondly, the Irish High Court has issued its judgment in the Neenan Travel case. This case involved an individual who was originally an employee of the company, who subsequently acquired a 16.7% shareholding and was appointed as a director. From the date he was appointed as a director, his PRSI class was changed to Class S. This change appears to have been driven by the fact that the individual was classed as a proprietary director for income tax purposes. The court found that this change was incorrect, on the basis that the individual was acting under the control of the company, which in turn was controlled by a third party, with the result that a contract of employment existed.
In essence, this ruling provides that the basic principles used to determine the employment status of an individual should also be applied to directors, with some modifications. As always, the employment status of an individual (including directors) must be considered “on balance”, based on all facts and circumstances. Accordingly, it is not necessary for all indicators to point towards being classed as an employee or self-employed in order to establish the position.
In the case of directors, the court was of the view that the starting point should always be to establish whether there is a “genuine” contract between the company and the shareholder directors. It is however necessary to establish the context of how and for what reason the contract came into existence, and what each party actually did pursuant to the contract.
If it is found that such a contract exists and is not a “sham” (e.g. a contract created specifically to avail of say Job Seekers Benefit in the weeks prior to termination), it is then necessary to consider whether an employer/employee relationship exists. In this context, the following factors are normally viewed as most relevant:
- The degree of control exercised by the company over the shareholder director
- Whether the articles of association give the shareholder director rights, such that he is in reality answerable only to himself
- Is the director capable of being dismissed and in what circumstances
- Whether the articles of association allow the director to vote on matters in which he has a personal interest; and
- How is the director remunerated?
There have been suggestions from DSP that if the underlying logic behind the UK court judgments was to be applied in determining the PRSI status of directors in Ireland, that the majority of directors would be classed as employees and subject to Class A PRSI. However, a recent ruling from the Social Welfare Appeals Office would suggest that they do not fully accept this, as they appear to be accepting that self-employed status (and the resulting Class S PRSI status) can still apply to directors, once the facts support such a position.
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