Understanding the Employment Relationships Deregulation Act (DBA Act) in the Netherlands

Until 1 May 2016, contractors in the Netherlands could secure certainty about their employment status by obtaining a VAR (Verklaring Arbeidsrelatie, or Declaration of Independent Contractor Status) from the Dutch Tax Authorities. However, this was replaced by the Wet deregulering arbeidsrelatie (DBA Act) to provide more clarity in client-contractor relationships.

Understanding Pseudo Self-Employment

Pseudo self-employment occurs when someone works as a freelancer or self-employed person on paper, but the actual working conditions mirror those of an employee. This misclassification can lead to serious tax and legal repercussions.

Consider a graphic designer, Maria, who is hired by a marketing firm, Creative Solutions, as an independent contractor. On paper, Maria is self-employed, submitting invoices for her services and managing her own taxes. However, her daily work situation tells a different story:

• Working Hours: Maria works from 9 am to 5 pm, Monday to Friday, just like the firm's regular employees.
• Equipment and Tools: She uses a company-provided computer and software.
• Supervision and Control: Maria reports to a manager, attends team meetings, and receives direct instructions about her tasks and deadlines.
• No Other Clients: Due to the volume of work and expectations from Creative Solutions, Maria does not have time to take on other clients.
• Fixed Monthly Payment: Instead of being paid per project, Maria receives a fixed monthly fee.

In this scenario, despite Maria's designation as an independent contractor, the reality of her working conditions aligns closely with that of an employee. This is a classic case of pseudo self-employment.

Why Avoid Pseudo Self-Employment?

The Dutch Tax Authorities may reclassify an employment relationship if it is deemed to be pseudo self-employment. This reclassification means that, from a tax and social security standpoint, the relationship is treated as employment, even if it appears as a service agreement on paper.

Consequences for Clients

Reclassification has significant impacts on clients, who then become de facto employers. They must:

• Deduct and pay social security contributions from payments made to the freelancer (now considered an employee).
• Pay employee insurance premiums and contributions to the Health Care Insurance Act (Zorgverzekeringswet).
• Contribute to any compulsory pension schemes.
• Adhere to obligations under applicable collective bargaining agreements.

Consequences for Freelancers

For freelancers reclassified as employees, the implications include:

• Reporting income as pay from employment instead of business profits or other activities in their tax return.
• Losing eligibility for entrepreneur tax benefits, such as the self-employed tax deduction.
• Potentially joining a pension scheme or taking out pension insurance, depending on the company.
• Meeting obligations under collective bargaining agreements.

The DBA Act

The DBA Act was introduced to clarify employment relationships, replacing the VAR scheme. Its goal is to help clients and contractors jointly assess whether their work arrangement constitutes paid employment or an independent contractor relationship. Model agreements approved by the Dutch Tax Authorities can provide certainty and help prevent misclassification.

When evaluating an employment relationship, it's essential to determine if it qualifies as actual employment. If so, the employer must withhold and pay salary taxes, continue paying salary during sickness and holidays, and follow specific dismissal rules.

Characteristics of an Employment Relationship

An employment relationship typically exhibits three characteristics:

1. Employer authority
2. Obligation to perform (personal) work
3. Remuneration

If these characteristics are present, it generally indicates an employment relationship.

Employer Authority

Determining employer authority can be challenging. If the worker is required to follow instructions or meet obligations imposed by the employer, this signifies a relationship of authority and thus an employment relationship.

Model Contracts

If one or more characteristics of an employment relationship are missing, a model contract can provide clarity. These contracts, available on the Dutch Tax Authorities' website, ensure there is no employment relationship. However, deviations from the agreement can lead to pseudo self-employment with all its associated consequences.

Lifting of the Enforcement Moratorium in 2025

To allow clients time to correctly implement the model agreements, a temporary enforcement moratorium was introduced in November 2016. During this period, the Dutch Tax Authorities could issue instructions if an employment relationship existed but only impose additional tax assessments in cases of malice.

As of 1 January 2025, the moratorium will be lifted, and the Dutch Tax Authorities will resume full enforcement. This includes imposing additional tax assessments where workers are found not to be genuinely self-employed, based on criteria set by the Supreme Court in the Deliveroo case.

Future Directions

On 10 November 2023, the public consultation on the new bill closed, with over 1,100 responses from various stakeholders. The Adviescollege toetsing regeldruk (Advisory Board of Regulatory Burden, ATR) advised that the bill does not simplify the assessment of employment relationships nor reduce the regulatory burden. A poll by online bank Knab showed that eight out of ten freelancers oppose the bill, highlighting significant dissatisfaction among self-employed individuals.

Legal experts have also pointed out to the Minister that the concept of "embedding" does not significantly differentiate employment from self-employment in case law. This ambiguity means that many situations that indicate embedding might not necessarily constitute an employment contract.

The future of this bill remains uncertain, but ongoing updates will be provided.

Conclusion

The DBA Act serves as a crucial framework to distinguish between genuine self-employment and disguised employment, ensuring that both clients and entrepreneurs comply with the legal requirements. As new laws and enforcement plans develop, staying informed and using tools like model agreements and the WBA can help prevent legal issues and provide clarity in professional relationships.

Staying vigilant and adaptable to these changes is essential for both clients and contractors to maintain compliance and avoid the pitfalls of pseudo self-employment.