Employees do not become indepentent (contractors) overnight


Although employers and employees only see advantages, their relationship cannot be simply converted into a principal/contractor relationship. The discussion about bogus self-employment has put this type of conversions in the spotlight.
Someone who used to work for you in your employment, and now does the same work as an independent contractor without employees, probably does not meet the qualifications for the principal/contractor relationship.

Bogus self-employment and the new DBA Act.

The DBA Act (Assessment of Employment Relationships (Deregulation) Act) should have clarified the situations that constitute bogus self-employment. But as the Act was not clear on many points, it was never enforced. A new act replacing the DBA did not make it, with the exception of the online module that can be used to assess employment relationships. Without being able to derive any rights from the module, clients and contractors can assess their relationship by answering questions in the online module. Please note if you intend converting an employer/employee relationship into a principal/contractor relationship. The DBA act is still decisive.

Dismissal of employee followed by hiring as an independent contractor
This conversion comes with disadvantages for the employee, as he or she will no longer be entitled to the transitional payment, severance payment and continued payment of salary in case of sickness, pension, invalidity insurance, and can no longer claim minimum wages. The employer, however, has the advantage that a contractor is much cheaper than when he or she was an employee.
In these situations, the Tax and Customs Administration could take the position that the employment contract has not ended and that the employment has continued. You will risk sizable penalties and additional tax assessments.

Risk of regret

Apart from the risk that on inspection the tax authorities may qualify the employment relationship differently than agreed by the parties, there is another risk. At some point in the future the independent contractor may regret his or her choice and argue that he/she is (has been) an employee.
This could have major consequences:
– Additional tax assessments, repayment by the contractor/employee of incentives like relief for new businesses and tax allowance for self-employed persons;
– On top of that, penalties could be imposed on both the contractor and the principal;
– The principal will be held liable for employed persons’ insurance contributions, such as the Unemployment Insurance Act, Invalidity Insurance Act, pension and leave.
– Lastly, the contract will end with immediate effect.

The independent contractor without employees

Independent contractors without employees are not just persons who have a vat-number and are registered with the Chamber of Commerce.
To qualify as an independent contractor without employees in the eyes of the Tax and Customs Administration, he or she should fulfil the criteria listed below:
– More than one principal
If he/she has just one principal, he/she will not easily qualify as an independent contractor, and if the work has not changed, ‘continuation of employment’ will be easily assumed.
– Hours and turnover The Tax and Customs Administration applies as a rule of thumb that independent contractors must work 30% of their hours and gain 30% of their turnover from other principals.
– Relationship of authority. The principal has no control over the working hours or days’ leave. These are determined by the contractor, who also decides on replacement.
– Materials. The contractor decides which and in principle buys the materials/equipment he/she uses.
– Employees who do the same work at the principal.
In that case the contractor will easily be qualified as an employee and not as an independent contractor.
– Nature of the work. If the work done by the independent contractor is the same as that of the former employee, he/she will be easily qualified as a bogus self-employed person. This could be avoided by a clear and detailed description of the new duties.

The above shows that someone does not qualify as an independent contractor without employees, solely because he or she decides to become one.
Finally: applying this type of constructions is always risky. For more information, please contact Yellowstone. We will be happy to help you. Our advice is free of charge.