We continue to see numerous cases wherein the legal status of a contract is in dispute: employment agreement or independent contractor? The effects of each qualification differ substantially. Proper drafting of the contractual arrangement is essential to avoid future problems, although the principle of “substance over form” applies as well.

Case

A Dutch company contracted a German individual to perform certain services from his home address in Germany. The ‘appointment letter’ signed by both parties, includes the words ‘employment agreement’. It also refers to ‘other employment conditions’. However, the parties also agree that the individual will bear all tax consequences, employer’s as well as employee’s.

Based on the wording of the appointment letter, the court ruled that the appointment letter was intended to be an employment agreement. The Dutch company defended itself by arguing that the parties had intended the individual to be self-employed. The company based its argument on the fact that parties agreed that the individual would bear all tax consequences. The court set aside that defence by arguing that although the parties agreed that the individual would bear all tax consequences, nothing in the appointment letter shows that the individual would do this as a self-employed person (and not in the capacity of employee).

What this means for you

Employers should be aware that the intentions of the parties are decisive. Initially these intentions will be derived from the text of the contract. Careful drafting of the services agreement therefore is essential. Nevertheless deviating practice may override the analysis of the contract text (substance over form).