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Employee or contractor? Recent changes in the Dutch business climate

For companies who are deciding to establish an office in the Netherlands, the legal form of the business is important. Equally important are the people who are going to work for the company: does the company want to hire employees or contractors? These two are very different. 

Employee

The three main features of an employment relationship are: that the work is performed personally; for which the employee is paid; and that a relationship of authority exists between employer and employee.

In the Netherlands, the law protects employees. An example of this protection is that an indefinite contract cannot be terminated without prior approval from the UWV (Employee Insurance Agency) or a sub-district court. Also, an employer is always obliged to withhold payroll taxes (loonheffing).

Contractor

As a contractor (or ZZP’er in Dutch), one does not have to perform the work personally. Furthermore, there is no relationship of authority between the employer and the employee. In other words, a contractor works independently.

An agreement with a contractor can be terminated by giving notice. Generally no compensation is due and termination is possible at all times. Another difference is that the company does not have to withhold payroll taxes. Therefore, it is understandable that many companies hire contractors instead of employees. A contracting relationship can be more easily ended and offers more flexibility to the hiring company.

But how can one be sure that the contractor is indeed a truly independent business person? Until May 1 2016, contractors obtained a so called VAR from the Dutch Tax Authorities. If the contractor was in the possession of a VAR, the company could be sure that this person was truly independent and that they did not need to deduct wage taxes and make social security contributions.

Recent changes in the Netherlands

Since May 1 2017, the VAR no longer exists. A new legislation has been introduced, the DBA (Deregulering Beoordeling Arbeidsrelaties) law. The enforcement of this law has been postponed until July 1, 2018.

This law entails the re-assessment of work relationships. It concerns a system of general fixed contracting agreements in order to gain security over the character of the working relationship and check whether it really concerns an independent contractor relationship (and not an employment relationship).

However, another possibility is for the company to submit its own contract for approval by the Tax Authorities. If this contract is approved or if one uses the model contracts, a company can be sure that it will not be liable retroactively for the payment of payroll taxes. But don’t forget: even when using such a contract, a company must make sure that parties act according to an independent contractor relationship and not according to an employment relationship.

Changes for managing directors

The recent changes also apply in the case of managing (statutory) directors: employees but also directors of a company. Do note that the general meeting of shareholders has authority over the managing director, meaning that they mostly work as employees. The general meeting appoints and dismisses managing directors, taking into account the notice period. No prior approval of UWV or a court is necessary in this situation.

Questions?

If you have any questions about hiring an employee or contractor or if you are a contractor with questions about the implications of new legislation about contracts, please contact one of our lawyers or submit your question online.

 

Update article: November 2017.

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