Labor contract or contract for services?

When somebody does work for another and gets paid for his services, we call this either a labor contract or a contract for services. Under the Law, the difference makes a big difference in terms of termination and liability. But what is the difference and how does this affect the contracting parties? Employment law solicitor in The Netherlands Sander Schouten explains.

Elements of labor contract under the Law

In the Netherlands an employment relationship needs to have three elements: labor (services provided), pay and a relationship of authority (between the employee and the employer). If these criteria are not met, we do not qualify this as employment. If somebody gets paid for work but there is no relationship of authority, this is called an agreement for services (for example when you seek advice of lawyer or contracting work for a new build house).

Employment law or contract law?

The difference lies firstly in the applicable law: labor contracts are governed by Employment law, services on the other hand are governed by the general contract law. Due to strict rules regarding e.g. working hours, wage and dismissal, an employer is limited in the way he wants to employ people. In case of a contract of services, however, parties are free to a large extent to agree what and how to wish.

Income tax and national insurance contributions

Secondly, in case of a labor contract both employee and employer are responsible for payment of (income) taxes and national insurance contributions. In case of a service contract, only the contractor is responsible for these payments. Seen these differences an employer can prefer on practical grounds (no protection against dismissal) as well as cheaper (no payment of tax / contributions) to hire someone in on a service contract basis.

Be aware for notional employment relationship

However, when a relationship of authority seems to exist between contractor and client, Law prescribes that this working relation indeed qualifies as employment, regardless the wording of the actual contract. If this is the case the tax and the national insurance authorities can claim the unpaid tax and contribution and even backdate this claim for 5 years.

Employment lawyer: relationship of authority

The element of authority relationship is thus essential for the difference between both agreements. While it has to be assessed on a case-by-case basis if there is a relationship of authority, there are some general rules. According to Case law the following circumstances are taken into consideration: the intention of parties, how does the provider get paid, is the provider free to decide how and when to perform the services and does the provider bare any entrepreneurial risk.