From assignment to employment contract: the consequences of reclassification.

Introduction

The likelihood of a self-employed relationship being reclassified as an employment contract has clearly increased since the Tax and Customs Administration began actively enforcing the rules, and will continue to grow as a result of policy changes. Not all cases are actively checked by the Tax and Customs Administration, and self-employed persons are increasingly invoking reclassification in the event of incapacity for work or after the termination of a long-term assignment. What are the consequences of this for the client who becomes an employer? What can you do now?

When is there an employment contract (after all)?

In short: the classification is based on the rights and obligations agreed by the parties and on the actual performance. The original intention is not decisive. Only a court can assess whether a relationship that was initially intended as an assignment has become or is an employment contract as a result of its performance. The risk of incorrect classification lies with both parties, but in practice the client bears the greatest risk. For more information about the classification, see my previous blog.

Does reclassification have retroactive effect?

Reclassification can take place retroactively. As an explanation of the announced legislation, it has been explained that if there is a legal presumption of an employment contract, this will apply from the start of the original contract. Reclassification can therefore lead to claims about the past and the future.

Wages after reclassification: self-employed rate or customary wage?

If the court has determined that the working relationship must be reclassified as an employment contract, the question arises as to how the employee who was previously self-employed should be remunerated. Self-employed persons often work at a much higher hourly rate than their fellow employees. Does the self-employed rate automatically become the gross wage? What is reasonable for the organisation and appropriate in relation to fellow employees?

There are two common approaches:

The self-employed rate becomes the gross wage

Employee rights (sick pay, holiday pay, pension, transition allowance, etc.) are added on top of this. This can lead to unacceptable outcomes. Not only is it a huge expense for the employer, but it can also lead to great inequality between employees.

Usual or fair wage

The law states that if no wage has been determined, the usual wage applies, or if that cannot be determined, the fair wage applies. The customary wage can, for example, be the collective agreement wage, a wage from a salary scale or a previously negotiated wage. If the agreed customary wage cannot be determined, the wage must be determined on the basis of fairness. The wages of fellow employees who do the same work can serve as a guideline, or by reducing the self-employed rate by the value of the employee rights.

This is clearly defined in the Architects’ collective labour agreement, for example. This collective labour agreement states: “a contractor is a natural person who works at his own expense and risk at a rate of at least 150% of the gross hourly wage, supplemented by an 8% holiday allowance, for comparable work in comparable circumstances”. This refers to the usual wage and expresses the value of employee rights plus holiday allowance as 58% of the basic gross wage. This is a very concrete indication of a fair wage.

Holidays and holiday allowance

Under EU law, holiday entitlements only lapse if an employer actually enables the employee to take holiday and informs them of the expiry date. In a self-employed working relationship, this was almost never enforced, as the self-employed person was free to organise their own time. This can therefore lead to discussions about the number of holiday days accrued, their value and the question of whether such a claim can become time-barred.

Illness and not working

If the worker was recently unable to work, they may be entitled (retrospectively) to continued payment of wages and a statutory increase, provided that their incapacity for work is demonstrated. Consider also any reintegration activities that were not carried out and the risk of an extension of the obligation to continue paying wages after 104 weeks.

Social security, tax and pension

The Tax and Customs Administration may retroactively collect employee insurance contributions from the employer. The employer may not recover these contributions from the employee; doing so is even punishable by law. The Tax and Customs Administration also assesses whether the self-employed person has paid income tax. If this is not the case, the employer may be held liable. Under certain conditions, this can be recovered from the employee. If reclassification shows that the worker was and is a compulsory member of a pension fund, the pension fund can reclaim contributions for up to five years. In theory, the employee’s share of this can be recovered from the employee under certain conditions.

Practical approach for clients and employers

● Conduct a qualification audit: map out authority, organisational embedding, schedules/hours, wage components, pension obligations and collective labour agreement applicability. This prevents surprises.

● Select and document a wage methodology: explicitly state that the current remuneration is only intended as a self-employed rate and not as a statutory wage. Determine in advance whether you will determine the employee wage in the event of reclassification using one of the above methods. Transparent job profiles, pay scales or valuation rules allow you to determine the usual wage accurately and prevent inequality.

● Value employee rights: If the wage methodology does not work for a specific self-employed person, record how employee rights are valued financially.

● Set aside funds for holiday pay and allowances: inform the contractor of their right to holiday pay and confirm annually that they are aware of this and have made use of this option.

● Guarantee tax and pension consequences: check whether the self-employed person pays income tax and have this confirmed. Record which additional tax assessments can be recovered from the employee under certain conditions.

● Communicate and regularise: if reclassification seems inevitable, convert to an employment contract (with clear wage agreements and hours) in good time to limit risks relating to the past and future.

Finally

Reclassification is not a matter of simply changing the label on paper. Mandatory labour law (e.g. sick pay, holiday entitlement, protection against dismissal, chain and on-call rules, pension, etc.) will apply retroactively. It is important for clients to proactively assess, document properly and regularise where necessary. Substantiate your choices and ensure the administrative preconditions are in place. We can, of course, help you with this.