Will Ongoing Contractor Relationships Qualify as Such After May 1, 2016?
Companies often seek to engage contractors to perform certain services. This may be for a variety of reasons, often because certain contractors have particular skills but are not needed on a long-term basis. The most important thing for any organization when making a decision to engage a contractor is to do everything possible to establish that there is a genuine independent contractor relationship and that the arrangement is not really an employment relationship. There can be severe and expensive consequences, both from a tax and civil law perspective, if a contractor relationship is not properly established.
The relationship of self-employed contractors will be substantially impacted due to new legislation in the Netherlands. This new legislation, the Deregulation of Assessment of Independent Contractor Status Act (Wet Deregulering beoordeling Arbeidsrelaties) (“the Act”),was accepted by the Dutch Senate on February 2, 2016 and will enter into effect May 1, 2016. A transitional period of one year (until May 1, 2017) applies. During the transitional period the Dutch Tax Authorities will not actively enforce the new legislation, but will focus mainly on providing information.
The Act will lead to an alteration of the Netherlands’ current system with regard to the Declaration of Independent Contractor status, the Verklaring Arbeidsrelatie (“VAR”). The VAR was a statement from the Dutch Tax Authorities that provided protection to the company as a commissioning party. If certain conditions were met, then designation as VAR-WUO (profits from business activities) or VAR-DGA (income from activities at the company’s risk and expense) indicated that the company did not need to withhold and pay wage taxes and social security contributions, even if the working relationship later proved to be an employer/employee relationship (excluding situations of bad faith on the part of the company). The VAR system offered a guarantee to the company that the Dutch tax Authorities considered the particular contractor an entrepreneur.
Due to the new Act, the VAR-statements will be abolished, and as a result this guarantee no longer exists. As a consequence, companies may lose protection and can be held liable for payroll taxes and social security contributions. It will become more difficult to review the relationship with the self-employed contractor. Upon entering into a working relationship, companies will now become the party with the primary responsibility of establishing whether the relationship constitutes an employer/employee relationship.
Under the new system a certain form of certainty regarding the qualification of the relationship can be obtained by either (i) submitting the individual contract for services to the Dutch Tax Authorities and asking for a judgment regarding the qualification of the relationship, or (ii) using a template contract drafted and published by the Dutch Tax Authorities. Note that this ‘guarantee in advance’ does not give a 100 percent certainty. If the Dutch Tax Authorities at a later stage conduct an investigation and conclude that the factual situation does not reflect a contractor relationship, but an employment relationship, the relationship will be re-qualified and the company must remit payroll taxes with retroactive effect.
Social Security Consequences
If the agreed contractor relationship is judged to, in fact, be an employment relationship, this also has consequences with regard to social security. The company will have to pay the premiums for the mandatory employee insurance schemes, as well as the income-related contribution for the Healthcare Insurance Act. These amounts could be substantial.
Civil Law Consequences
A genuine contractor relationship is governed by contract law and not by employment law. This provides contracting parties more freedom. However, a contract for services always has elements of labour (services provided, pay, and some level of relationship of authority between the company and the self-employed contractor). Therefore, also from a Dutch employment law perspective it is crucial to properly construe the contractor relationship. If from a fiscal law perspective the agreed contractor relationship qualifies as an employment relationship, this will most likely impact the qualification of the relationship from an employment law perspective. As such, an employment agreement will be in place.
Because employees in the Netherlands are well protected against dismissal and an employer in the Netherlands is limited by law in the way he employs staff, even more caution is required.
What to Do?
Due to the serious consequences the new Act could have with respect to contractor relationships in place within an organization, companies are advised to review current contractor arrangements and take necessary actions.