Netherlands: Contractor Verification Scheme, Authentication Certificates Axed

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By Marcus Hoy

March 17—A new law effective May 1 is likely to have a significant effect on relationships between companies and contractors, an Amsterdam-based attorney tells Bloomberg BNA.

Currently, companies are issued Verklaring Arbeidsrelatie or VAR certificates once the Tax Administration has established that the contractor is fully independent and has no other formal relationship with the contracting party. The VAR certifies that the company is exempt from payroll tax and social security contribution liabilities. Under the new rules, VARs will no longer be issued, and determining whether the relationship constitutes an independent service or an employer/employee relationship will become the joint responsibility of the contracting company and the contractor.

Companies can seek the Tax Administration’s opinion in determining whether a specific contract constitutes an independent freelance relationship, and model agreements will be offered by the Tax Administration for use by companies. No guarantee will be provided, however, that the relationship will not be redefined by the Tax Administration at a later stage.

‘Severe and Expensive Consequences'

In a Feb. 5 statement, the Jonesday legal firm said that the measure would place an increased burden on companies to demonstrate that the relationship is fully independent.

“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,” the statement read. “Companies may lose protection and can be held liable for payroll taxes and social security contributions. 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.”

In a March 17 statement, Claire Reynaers of Jonesday said that affected companies should prepare for the changes by reviewing their existing relationships with contractors.

Transition Period

A one-year transition period beginning May 1 will allow contractors and companies to amend existing contracts and their working practices where necessary, Reynaers told Bloomberg BNA. During this period, the Tax Administration will monitor developments but is unlikely to initiate enforcement measures against individual companies.

The measure will affect contractors in all areas of industry, Reynaers said, including freelance consultants in the financial sector.

“The abolition of the VAR statement will affect every self-employed contractor who performs services on the basis of a contractor relationship,” Reynaers said. “To obtain approval that the relationship qualifies as a contractor relationship, companies can make use of the model agreements published by the Tax Authority. However, the authority could reclassify the contractual relationship if the way the agreement is executed does not reflect a contractor relationship. If this is the case, the company would face having to remit payroll taxes as well as national insurance contributions with retroactive effect.”

Reynaers added that the Tax Administration has published guidance outlining how submitted contracts will be assessed, though some clarification was still to be made with regard to the text of the model agreements.

“The guide contains the framework that the Tax Administration will use to establish the contractual relationship and to provide certainty in advance,” Reynaers said “This will help companies assess when the Tax Administration might redefine the contractual relationship as an employment relationship.”

“If, for example, the company's authority to issue instructions has not been curtailed to a sufficient extent or if the obligation to perform work personally has not been arranged in the agreement, the Tax Administration will not provide certainty in advance,” Reynaers said.

Assessment Steps

The guidance contain four “assessment steps,” Reynaers said, based on civil law and case law. In accordance with the guidance, companies should consider the following questions when forming or revising contractor relationships:

  • Does an “authority relationship” exist between the company and the contractor?
  • Must the contractor personally perform the labor?
  • Are wages being paid and is there an obligation to continue paying wages?
  • Is the working relationship legally designated as a “'real” employment relationship based on an employment contract or a “notional” employment relationship based, among other things, on contracted work or a contract for services?
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    “It cannot be entirely ensured that no liability will arise,” Reynaers said. “It all boils down to the actual execution of the agreement and the factual situation. Taking into consideration the described framework, it is always advisable to explicitly state in the agreement that the contractual relationship does not qualify as an employment relationship and that the agreement itself is not an employment agreement since this reflects parties' intentions.”

    “It is important to note that if the contractor relationship qualifies as an employment relationship from a tax law perspective, this will most likely impact the relationship from an employment law perspective,” Reynaers said. “If an employment agreement is deemed to be in place, this means that the relationship becomes subject to Dutch employment law, which provides for fairly extensive protection for employees.”

    “It will be necessary to determine the situation in each separate contractor relationship,” Reynaers said. “We are awaiting further developments concerning, amongst other things, a promised civil law-based evaluation of the text of the model agreements. Therefore, we advise our clients to review their current relationships with self employed contractors, taking into account the assessment framework. When entering into new contractor relationships, we also advise them to make use of the model agreements published by the Tax Administration.”

    To contact the reporter on this story: Marcus Hoy in Copenhagen at correspondents@bna.com

    To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

    For More Information

    The text of the new law is available here, the Tax Administration’s guidance here, both in Dutch. An English language statement published by Jonesday is available here.

    For more information on Dutch HR law and regulation, see the Netherlands primer.