We are frequently contacted about setting up a payroll in the Netherlands by foreign companies. For some the Dutch rules are too expensive and prefer the employee to become self-employed. But can he? Hence we investigate employment versus self-employed.
Employment is a situation where the employer instructs the employee when to do the job, what to do and how to do it. In return the employee is paid a salary.
Based on the tax treaties the employment is taxed in the country where the employment is being done. That is the Netherlands. The employee is then also socially insured in the Netherlands.
Self-employed stands for a person who does not receive instruction how to do the job, but is being asked to do a job. That is a significant difference.
For the Dutch tax office a person is self-employed when there are multiple clients, at least three, risk is ran on the job by the self-employed person. The self-employed person is expected to make investments.
Converting an employee in being self employed
The Dutch tax office is very keen to see that an employee is indeed treated as an employee. The means of the tax office to force you to comply are extensive and expensive, cost wise.
What not to do?
You cannot use the employment agreement as base of the cooperation with the now converted self-employed employee. If you do use this agreement, by simply changing the name of the document, the content of the document still makes it an employment agreement. The conversion of employment versus self-employed then failed. The ‘employee’ can use that in his or her advantage the moment you no longer wish to have the ‘employee’ work for you.
An agreement is best set up between you and the self-employed person, but please do not use the phrase employee in this document. Easy made mistake we often see.
Part of being self-employed is that you the entrepreneur has other clients. Hence a document stating the ‘employee’ is working 40 hours a week for the client implies employment.
The agreement cannot state that holiday pay is being paid, or that the remuneration is continued to be paid in case of holiday or illness. Nor can the agreement state that only the person who signed the agreement can performing the service without being replaced.
Should you convert the employee into being self-employed?
We think you started a ticking time bomb. As long as things go well in the employment versus self-employed conversion, you have no issues. The moment the ‘employee’ does not live up to the expectations and you want to dissolve the agreement. The ‘employee’ will become aware he is not entitled to unemployment. Or if you do not continue paying the ‘employee’ while the employee is disabled, the ‘employee’ can become aware that he is not entitled to disability benefits.
Those are the moments the employee starts seeking advice and the (labour) lawyer will soon state that this was not a self-employed agreement, but an employment agreement. As the employer is not protected by a correct employment agreement, the employer becomes a sitting duck.
How can the ‘employer’ become a sitting Duck?
If the forced employment versus self-employed conversion situation results in the ‘employee’ seeking advice with Dutch lawyers and the conclusion is that the agreement is in fact an employment agreement, the employee is an employee. An employee is a protected person in our legislation, hence the contract cannot be terminated without following procedures. If the employment is drawn up as if being self-employment, this is a very expensive procedure for the employer.
The moment it becomes clear to the Dutch tax office that your self-employed person is in fact an employee, the Dutch tax office will investigate and run a payroll for you. In this payroll the total invoice amounts, so the invoice including VAT, is regarded net salary. That amount will be grossed up with social premiums plus 25% or 50% penalty, retro actively. Nightmare scenario.
Is the employee an entrepreneur?
We painted a very dark picture above based on experience and jurisprudence how it can go wrong for the ‘employer’ in the employment versus self-employed situation. But can you turn an employee into an entrepreneur? The employee suddenly needs to register as self-employed, even though he might not fully agree. The employee needs to register with the Dutch tax office and file Value Added Tax returns. If he is too late, and many newly started entrepreneurs are too late filing a VAT return, a huge penalty assessment is issued.
Then the income tax return is more complex, social insurances are much less, but also much less is covert. No more unemployment benefit. No more mortgage refund.
As foreign employer you want to be a Dutch employer as well
In this time and age where finding an employee is like treasure hunting, you should be careful what you wish for when you as employer start to be creative. Your creativity might bite you when the employee suddenly discovers self-employment is exactly what he was seeking for and finds other clients. Maybe better paying clients than what you pay.
More likely is that the employee does not want to comply with all those rules and regulations of being an entrepreneur. Maybe the employee likes to be fully covert for disability and unemployment. Maybe the employee likes the simply life including the mortgage refund.
Maybe the employee decides not to work for you (anymore).
We have the opinion that if it looks likes like employment, it is employment. This is basically the opinion of the Dutch tax office as well. We understand the Dutch system might be complex for you with all the rules and regulations.
Our aim is to guide you through the process where we do the majority of the work for you. We have enough expertise in our network to have you assisted with labor law advise or company insurances.