Self-employed or an employee? That's the question

The Deregulation Assessment of Employment Relationships Act, DBA Act, entered into force on 1 May 2016. The Declaration of Employment Relationship, VAR, has therefore been repealed. The purpose of the DBA Act is to provide clients with certainty in advance about the (employment) relationship they enter into with contractors, so that it is clear to the client whether he must pay payroll taxes. (NB: FHI is organizing an interactive workshop on this topic in collaboration with Tjeerd Hoekstra on Monday, June 13).

Abolition of the VAR

Until now, the Tax Authorities could not levy additional payroll taxes on the client if it subsequently transpired that the contractor had wrongly failed to withhold payroll taxes and the contractor had a valid VAR declaration. The responsibility lies with the contractor and the Tax Authorities. The DBA Act aims to place that responsibility with the client and contractor and improve enforcement by the Tax Authorities. In addition, the DBA Act aims to make the conditions for a contract clearer and to reduce administrative burdens and implementation costs for the Tax Authorities.

DBA Act

Based on the DBA Act, the Tax Authorities will assess whether the concluded agreement is considered a fictitious employment relationship from a tax perspective. If this is the case, the client must withhold payroll taxes on the compensation that the contractor receives. The question is on which points the Tax Authorities assess whether there is a fictitious employment relationship. The Tax Authorities have published the Guidelines for the assessment framework for employment relationship agreements, Guidelines for the DBA, on their website. Three elements play a role in this: there is a relationship of authority, the work is performed personally and there is compensation. An employment contract implies a relationship of authority and the authority to give instructions from the employer. Parties that do not conclude an employment contract will have to make agreements about the scope of the authority to give instructions from the client. It is impossible to completely exclude the authority to give instructions. As long as the authority to give instructions is limited specifically to the content and scope of the assignment and the result, there will be no reason to assume a fictitious employment relationship. In addition, an employment contract is characterised by the employee's obligation to perform the work personally. If a contract of assignment does not stipulate that the contractor may be replaced, the starting point is that the work must be performed by the contractor himself. In that case, there is a fictitious employment relationship. To prevent this, the contract must contain a provision on the replacement of the contractor. This must involve "free replacement". With the exception of a limited number of fixed objective criteria, the contract may not contain any conditions that give the client the option to refuse the replacement. These objective criteria must be directly related to the specific work performance and not to the person of the replacement. These two elements are cumulative. If there is a relationship of authority and the contractor cannot be replaced freely, the compensation automatically takes on the character of wages from which payroll taxes must be withheld. Parties may submit the agreement to the Tax Authorities, but this is not mandatory. The Tax Authorities will give an opinion on the question of whether the agreement is considered a fictitious employment relationship. The starting point is that the Tax Authorities will give an opinion on the submitted agreement within a period of six weeks. The opinion of the Tax Authorities is valid for 5 years, with a reservation if the legislation or regulations change in the meantime. The opinion of the Tax Authorities does not provide certainty about the fiscal qualification of the income and the levy of income tax for the contractor. The DBA Act does not make contracting with a self-employed person impossible. However, the DBA Act does mean that new agreements must be drawn up in accordance with the guidelines of the Tax Authorities and must be implemented in practice according to the letter. Text: Tjeerd Hoekstra, lawyer at CMS Derks Star Busmann