With the news that the Dutch government has decided against implementing a statutory minimum rate for freelancers, it is clear there is no easy way to classify independent contractors, as the UK and Californian legislators have already discovered.
According to the Dutch government, the proposal would lead to too high an administrative burden for self-employed contractors without any staff, known in the Netherlands as ZZP.
The Dutch proposal. The draft law — Minimum Remuneration for the Self-employed and Self-employed Status Statement Act (Wet Minimumbeloning Zelfstandigen en Zelfstandigenverklaring) — proposed that as of Jan. 1, 2021, individuals would have to earn at least EUR 16 (USD 17.88) per hour to be classed as self-employed independent contractors.
This rate, which would have applied to all freelancers working in a business environment or providing services to private customers, was clearly aimed at gig workers, such as delivery drivers and couriers, who are open to exploitation.
Self-employed workers earning more than €75 (US $82) per hour would have had the option to agree with their client and make a declaration that they are to be treated as self-employed for tax purposes. This would allow the hirer to avoid any risk of incurring tax and social security contributions during an assignment lasting for a maximum of one year.
Employers hiring workers on rates between €16 and €$75 would be liable for tax and social security contributions if those classed as independent contractors were not genuinely self-employed.
The draft was published Oct. 28, 2019, for public consultation but on June 15, Wouter Koolmees, Minister of Social Affairs and Employment, announced that the proposal was to be scrapped.
Job-based classification. The only part of the proposal that the government will implement is a so-called web module that is intended to show whether the Tax Authority would consider a freelancer to be self-employed or an employee, based on the job they are engaged to do. A pilot trial of the web module was announced by the Minister on June 15.
However, the module has also faced criticism. This module is likely to be similar to the UK government’s much-derided CEST (Check Employment Status for Tax) tool, asking clients to identify the role requirements and other elements of the relationship with the contractor through a series of questions, and giving an assessment based on that information.
Broader IC implications. As both the UK government and the state of California have found, there is no easy way to distinguish whether an individual is an employee or self-employed.
The IR35 Off-Payroll Working Rules introduced in the UK in 2017 for public sector employers were due to be rolled out to the private sector on April 6, 2020. Due to coronavirus and a fair amount of criticism about the complexity of the rules, they were postponed until April 2021.
The provisions of AB 5 California’s law targeting the misclassification of ICs, effective from Jan. 1, 2020, have been the subject of heated debate since before the bill was even signed into law on Sept. 18, 2019. AB 5 already provides carve-outs for the insurance industry, physicians, surgeons, dentists, podiatrists, psychologists; and licensed veterinarians, lawyers, architects, engineers, private investigators, and accountants; securities broker-dealers, investment advisers, and their agents; and certain commercial fishermen. The latest group to win amendments to the bill has been musicians with many more industry bodies lobbying for changes for job categories including journalists.
Across the world, the legal determination of employment status for tax and employment rights is based on an inexact science. No single factor is determinative, least of all what label the client and worker give their relationship. The degree of control and the extent of economic dependence that will make somebody an employee is not clearly defined, and never will be.
The withdrawal of this proposal by the Dutch government illustrates how difficult it is to shape policy for such a diverse group of workers. The global response to coronavirus has highlighted the precariousness of self-employment and a need to protect lower-paid workers. But at the other end of the earnings scale, laws such as IR35 and AB 5 are designed to discourage misclassification by increasing the risk for employers. It is clear there is no one-size-fits-all approach that works.
In a recent report, SIA looks at the ways in which the law classifies independent contractors across 21 different countries. The report also identifies the different models independent contractors use to provide their services, which can differ from country to country; and highlights some of the services provided to employers for the payrolling and administration of the contingent workforce in each of those countries. CWS Council members can access the report here.