Update challenges for the Recruitment Industry: Working with Self – employed contractor in the Netherlands
The Assessment of Employment Relationships Deregulation Act (Wet deregulering beoordeling arbeidsrelatie; “DBA Act, replaced the Declaration of Independent Contractor Status (Verklaring arbeidsrelatie; “VAR”).
Under the DBA Act, the withholding of payroll tax and social security contributions by principals on the remuneration paid to their contracted parties will be waived. The waiver only applies if the agreement with the contracted party has been presented to the Dutch tax authorities for review, or if one of the model contracts on the website of the Dutch tax authorities has been used. By using the model contracts, the principal and the contracted party are assured that there is no withholding obligation for payroll tax and social security contributions purposes if / and as long the activities are also actually performed in accordance with the approved (model) contract. The DBA Act limits itself solely to assessing whether a withholding obligation for payroll tax and social security contributions is embedded in the labour relationship.
According to Dutch law the relationship between a (“self-employed”) contractor and a Company will be treated as an employment if it meets the following conditions:
- There is a relationship of authority whereby the employer can give instructions to the employee;
- The employee is obliged to personally carry out the employment agreed upon;
- The employee receives a wage.
These three criteria can be solved in a proper contract of services between the Agent and the Contractor.
Saying this one of the challenges you have is to make sure that the possibility you have by law to give instructions to the contractor will not be treated as supervision by the Tax authorities.
The authority relationship
An authority relationship can be assumed if the client can, as a rule, issue instructions and directives in regard to the work and the contractor must follow them. The extent to which instructions and directives are actually given is not decisive. Even if few, if any, instructions and directives are given because of the simplicity of the work (packaging cakes or picking strawberries) or in consideration of the qualifications of the contractor (the experienced legal expert), there may still be an authority relationship.
In practice, authority will frequently be expressed in directives on the performance of the work and related matters, but can also be expressed in other ways. Provisions not directly connected with the performance of the work are mainly important when the principal does not possess the necessary expertise to give the work-related directives themselves; this may, for example, be the case in the working relationship of a doctor in the service of the social insurance implementing body. Often, in this type of situation the principal does not possess sufficient medical expertise, but nonetheless exercises authority.
Within Dutch legislation, ( the applicable articles for a contract of services 7:400 et cetera) , there is also a possibility to give an instruction to the contractor.
Authority and labour self employment
Article 7:402 Obligation to follow the directions of the client
– 1. The service provider must follow the directions which the client has given him with regard to the performance of the service, as far as these directions are responsible and given in time.
– 2. When the service provider is not prepared, on reasonable grounds, to perform the service in accordance with the directions given by the client, but the client nevertheless insist that he follows these directions, then the service provider may terminate the service provision agreement if he has serious reasons for doing so.
Article 7: 402 Dutch civil law, makes life for the tax authorities and all parties concerned a nightmare.
The Dutch Civil Code identifies the “contract for the provision of services” (overeenkomst van opdracht). Section 400, Book 7, Dutch Civil Code, reads: “The contract for the provision of services is the agreement under which one party, the contractor, undertakes the obligation towards the other party, the principal, to perform work not under an employment contract and consisting of activities other than creating a work of a material nature, keeping custody of property, issuing works or transporting persons or property.” In view of this statutory definition, a working relationship that at first glance would appear to qualify as a contract for the provision of services must still be reviewed as to whether the agreement in question is not actually an employment contract.
In light of the case law of the Supreme Court, the following should be noted in regard to the relationship between the contract for the provision of services and the employment contract.
Parties entering into a contract extending to the performance of work for payment can choose to structure the contract in a number of ways. What applies between the two parties is determined by what they intended when entering into the contract, partly in consideration of the way in which they actually performed the contract (and thus interpreted that contract). Based on the content of the contract established in this interpretation, the court can then determine whether the contract qualifies as one of the special contractual forms regulated by law. There is no one single characteristic that is decisive; the various different legal effects that the parties associated with their relationship must all be viewed in their mutual context.
A contract for the provision of services may also include issuing directives. The simple observation that directives can be given in a working relationship does not automatically lead to the determination that that working relationship is an employment contract. If, however, there is no authority to issue directives at all in the working relationship, it can be concluded that the working relationship is not an employment contract.
There are two significant differences that can be identified between the authorization to issue directives under a contract for the provision of services and the same authority in the context of an employment contract.
The first significant difference is that in a contract for the provision of services, the directives can only relate to the instruction agreed in advance, while under an employment contract the authorization to issue directives is of a more general nature.
The second major difference is that in a contract for the provision of services, the contractor is not obliged to comply with directives that are not given sufficiently in advance or which are not considered sound from the perspective of proper performance of the instruction. In a contract for the provision of services, the focus is on the result agreed upon in advance, while with an employment contract, the emphasis is on the employee turning in a certain level of effort.
The Dutch tax authorities is trying to solve this problem by forcing companies to wave and or limit the rights which they officially have according to the Dutch Civil code article 7:400.
Please beware that there are good reasons to have this article in you contract of services, especially when you have a conflict with your client regarding the poor services of the contractor et cetera.
This will result in the fact that you have to make a decision;
You agree with the possible forced limitation of the possibility to give instructions to the contractor to receive an approval from the Tax authorities for the contract of services, and you take the risk that you may suffer legal consequences in the near future if you have a dispute with the contractor, or you fight the limitation with the tax authorities and you have to wait a long period before you receive an approved contract of services. You can of course also agree with the limitation and officially you start a procedure to alter the contract according to your wishes.
However, the most important point is that the “self-employed person” (SEP) will perform his/her duties as an independent contractor and that the Staff Hirer treats the SEP as such.
Failure to do so will give rise to, inter alia, the obligation to deduct wage tax and the risks ensuing from Title 10, Book 7, of the Dutch Civil Code and the Dutch Act on Work and Certainty (i.e. transition compensation, notice compensation, etc.) and of course all parties in the chain will want to recover these losses, compensations and costs from each other.
The parties who can prevent these claims are ultimately primarily the “independent contractor” and the party on whose premises he/she performs his/her duties (the Staff Hirer). If all parties make sure that the duties are performed in accordance with the agreement, certainty will be obtained regarding (inter alia) the obligation to deduct tax.
For this reason it is of utmost importance for the Recruitment Industry to agree with the client ( staff hirer) that they will monitor the activities of the contractor and that they will treat the contractor as Self- employed, or at least that the client is willing to assist the Recruitment Companies.
If several parties are involved in a working relationship (agency, intermediary, staff hirer, re-hirer), the Supplier’s relationship with each of these parties must be assessed; in principle, an employment relationship may exist with each of these parties.
To answer the question of whether or not a person is working on the basis of an employment contract, it is necessary, to check all contracts in the chain and first of all, to check section 7:610 of the Civil Code. This section describes four elements which must be present in order for an employment contract to be applicable, i.e.:
- relationship of authority
- obligation to perform work,
- obligation to pay wages,
- a certain period.
The conclusion is that before you start to work with a self employed contractor it would be wise to do your homework. Be aware that if the relationship will be qualified as employer-employee, the Dutch Chain Law will also be applicable.( also applicable in margin only situations!)
First discuss with you clients if they are willing to cooperate and beware it is also in their interest to cooperate.
Source: Adrie A.M. de Poorter B.BE, CEO / International Tax Advisor /LinkedIn/