The problems associated with the hiring of freelancers are substantial and quite unclear. The problems may be encountered in view of article 3 of the Dutch Wage-Tax Act which defines the situation whereby a person has a fictitious (deemed) relationship of employment with the temporary employer. A consequence of a fictitious (deemed) employment relationship is that tax and social security contributions are to be paid by the temporary employer as if the freelancer had an actual employment relationship with the temporary employer. The same applies to individuals who use their own limited company.

In itself, the text of the act is clear and applicable. The problem is due to the question as to when a person can be considered to be self-employed, i.e. to have independent status.

Practice shows that especially in the IT industry and Telecom industry a freelancer is hired for several months of 40 hours a week. The freelancer is in principle working under the control and supervision of the temporary employer and is therefore accountable to such temporary employer on a daily basis. As a consequence, both the tax office and the industrial insurance board are quickly inclined to take the position that the employment relationship is in fact fictitious.

As per January 1st 2002 a self employed person or director-share holder of a one man (Dutch or foreign) limited Company can apply for a VAR declaration. A VAR declaration (Declaration of Labour Relationship) is a declaration provided by the tax office. This declaration provides the probable self employed freelancer and the principal/company clarity regarding the withholding and payment of taxes and employers contributions.

However, the principal/company does not have to withhold taxes and social security contributions if the VAR declaration states that the individual will not be treated as an employee.

The VAR has no value if the principal/company should be reasonably aware that the Freelancer is employed by him. In that case the principal/company has to withhold the required taxes and premiums for social security etc. If you have a VAR declaration which states that the individual is not an employee, but you as a Company have reasons to doubt this declaration, then you have to deduct taxes and premiums, if not the authorities will hold you liable for not doing so.

The company should be reasonably aware that the freelancer is (deemed) employed by him in case of any or a combination of the situations below:

• there is a relationship of authority between the company and freelancer (or the work is done in the companies office, the individual has an email address of the company etc.)
• the company gives instructions with respect to the work of the freelancer
• the company pays wages during holidays or during illness of the freelancer
• the freelancer has only one client, or one big client for which the majority of the time is spent besides one or two (very) small clients

Please note that in the situation whereby you hire a self-employed person through a third party, there will be a 99% chance of a situation of deemed employment either for the company or the third party.

Situations which can occur :

1. A company directly hires a freelancer with a VAR declaration

Company > Freelancer

Actions: Check the VAR declaration and if possible the application form and ask yourself the question if you have any reasons to doubt the declaration.

2. A company hires a freelancer with a VAR declaration through an AGENT

Company > AGENT > Freelancer

Both the brochure of the VAR and an enclosed letter of the tax office state that there is a huge possibility that the employee will be treated as a deemed employee. You will possibly have a problem with the authorities. Ask for clarification. Sometimes companies and agents are not aware of other problems that can occur. It is not only a tax and social security contributions liability they have, but also a potential employment risk.

Please beware that in a market were it is not obvious that a freelancer automatically has a new job if the old one has finished, he or she can and will try to claim employment (based on article 610 book 7 (Dutch civil code)) with either the agent or the principal. In the recent past it has happened that both agents and principals had to pay indemnity payments although they assumed they were working with freelancers. To avoid uncertainties and high risks it is therefore advisable to work with a third party, agent who employs the contractor or is using the opting-in method.