In the Netherlands parties have the freedom to arrange for their legal relationship as they please – as long as they remain within the boundaries of compulsory law.
Importantly, under Dutch law contracts are classified on the basis of their de facto execution. What matters is the way in which work is carried out under a contract, and not the title of the contract or declaratory statements it may include. The actual facts in the relationship between parties will ultimately define the legal status of the agreement.
This means that the Dutch tax authorities or Dutch courts might view contracts with freelancers (working on a service agreement or a so called “overeenkomst van opdracht”) as employment contracts even when the parties explicitly and specifically agree not to have an employment relationship – so long as the factual analysis of how work is carried out under a contract indicates that an employment relationship does in fact exist.
An important consideration in this regard concerns the degree of instruction and supervision that exist between the parties as a matter of fact. As a rule of thumb, the higher the degree of authority (instruction and supervision) de facto exercised by the service receiver over the service provider, the more likely it becomes that they will be deemed to have an employment relationship.
The existence of an employment contract under Dutch law roughly leans on three pillars:
- The work is executed by an appointed individual and this individual must perform all duties himself or in person and cannot send someone else to perform the duties;
- The service-receiver has the right to give the service-provider instructions on the content and on peripheral circumstances of the work (e.g. working hours/times, location etc.);
- The service-receiver pays wages to the service-provider.
Many freelance consulting agreements de facto meet the abovementioned criteria. This means that under Dutch law many freelance consulting agreements are in fact employment agreements.
The consequences of a freelance agreement being classified as an employment agreement is twofold:
- the “consultant” can now enjoy the fairly protective Dutch employment law (e.g. employer must pay an employee during sickness and the employer cannot terminate the employment agreement for convenience; and
- the employer is obliged under Dutch law to withhold wage taxes and premiums (and may even incur fines of up to 50% of any non-withheld taxes and premiums)
Up until 1 May 2016 this risk could be partially mitigated by companies by way of providing freelance consultants they engage with a with a so-called “VAR declaration”, stating that the independent contractor was just that and not an employee. This possibility has been abolished and the VAR no longer exists.
The new system that has been created and is currently in force, which is based on model contracts provided by the tax authorities, has so far been met with skepticism and it remains to be seen how it will work out for parties involved. Moreover, up until now the tax authorities have not been able to handle the increased workflow that resulted from these changes.
For a company to refrain from unintentionally entering an employment relationship with a freelance consultant, it remains of great importance that neither the language of the contract nor its factual execution indicate otherwise.
Slight nuances in the language of the contract may have big consequences. Accordingly, while it is not possible to be 100% certain of the classification of a specific contract before it is actually executed, we help our clients by making sure the contracts they use to engage freelance consultants are phrased in a way that minimizes the risk of being classified by Dutch authorities as employment contracts.
If you want more information on this topic or if you need assistance in a specific case, please do not hesitate to contact us by phone or email: email@example.com