Tax Status
If flying clubs are paying people illegally then it is them that is at risk. They would do well if they haven't already done so to approach the Revenue and make an agreement with them. The defination of 'self employed' is not clear cut. You don't become an expert reading a form.
But what are the consequences to the instructor. A Revenue agreement for schedule D status allows you to set against your income all those expenses incurred, such as; Training, Test fees, CAA charges, Medical expenses, Journals, text books. some travel (not to and from work) and reasonable postage and telephone costs. These are just a few.
The last survey of professional pilots indicated that in excess of 80% of current airline crews were 'self improvers', that is they had paid for their own training and progression in the industry. Schedule D status does not mean that you are self employed but put simply, you may account for you income/expenditure on an annual basis. It is a recognision that you will have considerable out of pocket expenses but an uncertain income. In the case of pilots/instructors it is as true as it is with say an actor/entertainer.
Don't throw the baby out with the bath water for it will cost you. The last time that this industry did so was with regard to NVQ tax relief. Don't be a fool, put the brain in gear before opening the mouth - comes to mind.