District Court of The Hague: “Combination of employee and proprietor not possible”
On 26 February 2021 , the District Court of The Hague ruled in a case against a Chinese knowledge migrant who is employed by a payroll company, and was subsequently seconded to a company she owns. In 2019, the Dutch Immigration and Naturalisation Office (IND) withdrew her residence permit retroactively until 27 November 2012 because on that date, she acquired all the shares of the entity in which she was the only person employed. The IND considers that this means that she can no longer be regarded as an employee and therefore a knowledge migrant, and, actually, must be regarded as a self-employed entrepreneur. As a result, she lost her rights under the knowledge migrant scheme.
In 2006, the Dutch knowledge migrant scheme was introduced to make the Netherlands more attractive to investors as a ‘knowledge country’. The application for a traditional work permit was, and is, far too complicated and unpredictable. Therefore, the conditions for knowledge migrants were briefly laid down in the regulations. It is stipulated that a knowledge migrant must work (1) ‘on the basis of an employment contract’. In addition, the foreign national must be employed by (2) a sponsor, and receive, on (3) a monthly basis, in their bank account a net salary that (at least) meets the salary requirement. In order to avoid sham constructions, from 2011 (4) the salary must be in line with market conditions appropriate to the position, training and experience of the employee.
Bright and fast
In recent years, not only have Dutch employers seen the benefits of the clear and rapid proceedings, knowledge workers without a traditional employer also discovered the possibilities. They concluded an employment contract with a payroll company that then employs them in a company that they (partly) own. The payroll company remains the formal employer and defines and supersedes the frameworks of the employment, but the execution of the work can largely be determined by the knowledge migrants. Of course, they receive the appropriate salary so that all conditions are formally met.
This professional triangle offers enterprising knowledge migrants significant advantages over a self-employed permit – especially if the foreign national does not have American, Japanese or Turkish citizenship, for whom more flexible conditions apply.
A knowledge migrant often gets an approval within two weeks. The application of an independent entrepreneur takes an average of six months, with outliers up to a year. Furthermore, the patient applicant must provide an extensive package of (translated) documents. There are numerous vague conditions, the outcome of which cannot be properly predicted, such as around the business plan and ‘the Dutch interest’. In addition, the fee for the application is approximately € 1. 000,- higher and the license is issued only for two years, on which a package of documentation must be refiled again. And once the knowledge worker has started, they are not covered by the 30% tax reduction scheme. Finally, To make matters worse, the self-employed professional must pass the (extremely difficult) Dutch driving license exam within 185 days whereas a knowledge migrant can simply exchange their foreign driving license without a test.
This list of disadvantages is far from complete, especially if the self-employed has family members. Many enterprising knowledge workers would therefore have waived the Netherlands as an establishment country if they were not eligible for a residence permit as a knowledge migrant.
New approach IND
Against this background, the new, hardened approach of the IND that comes to light in this case of a Chinese knowledge worker is remarkable. In fact and formally, it fulfilled the conditions laid down in the scheme. The IND accused her of failing to anticipate the changed application of existing legal concepts and therefore of withholding information. The IND now considers her to be an independent entrepreneur because she holds more than 25% of the shares of the BV in which she operates. The knowledge migrant does not deny these facts, but she points out that according to the conditions of her residence permit, she is also eligible to work as an independent entrepreneur as long as she complies with the conditions under the highly skilled migrant scheme. One does not rule out the other.
The court, however, agrees with the IND. The Chinese knowledge migrant was able to ‘determine the content of her work and her wages’. By referring to the concept of ’employment’, the court found that ‘there is no relationship of authority, which means that the foreign national is no longer employed as referred to in the knowledge migrant scheme’.
This is a very far-reaching judgment which can have major consequences for this group of knowledge workers. However, the court completely misses the mark on five crucial points.
Concept of employee?
First, it makes an incomprehensible mistake by referring to the concept of ’employee under the knowledge migrant scheme’. That scheme, however, does not contain a concept of ‘employee’, let alone that it has been worked out a definition. The court is not getting to the heart of the problem. In order to further cut that corner, the court will look for the interpretation and interpretation of the concept of employee in the case law of the EU Court of Justice (in the cases: EU:C:2012:263, ECLl:EU:C:2017:566).
It is then unclear why the court is moving on to EU law without explaining why the concept of workers under the EU Working Treaty serves as a starting point for implementing a Dutch regulation. The assessment must then be the first to establish that this national legislation also has interfaces with EU law. That is not the case here because this is regarded as an internal matter of the Netherlands as migration regulations, with regard to a third-country national are outside the scope of EU directives and regulations.
Relationship of authority
If we were to forgive the court, the third criticism is that the two judgments do not answer the question of what exactly is meant by a relationship of authority with an employee, and how that should be understood in this triangle. In fact, in terms of content, these rulings deal with completely different legal questions. Nevertheless, the court speaks of an ‘interpretation’ by the Court.
Foreigners Employment Act
Remarkably, the court, fourthly, does not examine the mirror image of ‘the employee’ in the Aliens Employment Act – on which the knowledge migrant scheme is based – being the ’employer’. And a payroll company or other worker’s maker fits in wonderfully: ‘the person who has another work carried out in the performance of a post, profession or business’.
Dutch case law
Fifth, the court ignores the relevant Dutch case law on the concept of employee. It could have seen that this had already been thought through in a nuanced and detailed way. This is most clearly followed from the cases under the Dutch Unemployment Act (Ww). Like the Aliens Act, this Act falls under administrative law, which regulates the formal relations between citizens and public administration. There is also a direct interface in terms of content – unlike those two European issues – because in both cases a citizen will only receive something when they are an employee – a Ww benefit or a permit, while the Employee Insurance Agency (UWV) or the IND may have reasons to withhold that claim and oppose an overly broad interpretation of the concept of ’employee’.
In this administrative framework, the question of when an employee is still present can be validly addressed. Established case law of the Dutch Central Council of Appeal and the Supreme Court stipulates that a relationship of authority between an employee and employer must only be viewed in a formal manner. Actual influence on the content of work or salary does not affect that relationship of authority and therefore the status of the employee. (see above ECLI:CRVB:2014:227)
It follows from that case law that directors are considered an employee themselves if they have less than two thirds of the shares of the company in which they work. The case before the court concerns an employee employed by a payroll company of which she has no shares and also exercises neither actual nor legal but any participation. It is inexplicable why it is simply considered an employee under the Ww, but not under the Aliens Act, when the same conceptual frameworks apply.
In short, the IND supplements conditions for the knowledge migrants that are not included in the applicable regulations. The court confirms these ‘further insights with today’s knowledge’ uncritically and without valid legal justification and thereby retroactively resets the knowledge migrant to zero with seven years. However, elsewhere in administrative law under the Ww, it is stipulated that a formal relationship of authority only in extreme cases detracts from the concept of employee. The lack of a factual relationship of authority does not play a role in this.
It has come to our understanding that the Chinese knowledge migrant did not lodge an appeal because she has now secured her right of residence on other grounds. We are convinced that there are solid legal arguments to challenge this ruling before the Dutch Council of State. However, we also know that the IND will continue to revoke residence permits on this questionable basis. There is therefore a good chance that the Council of State will have to deal with this issue in the next one to two years.
Although the regulations and this ruling leave many open questions, it is wise for payroll companies and knowledge migrants not to sit still and await the developments. It is clear that the IND has issues with maintaining the secondment triangle under the current regulation, although that ratio is legally enshrined, among other things in the Labour Allocation Act by intermediaries (‘Waadi’) and the Civil Code (Article 7:690 et seq. of the Dutch Civil Code). We recognise that the IND can encounter bottlenecks such as; vague activities, unclear agreements, lack of transparency, etc. We can imagine that the IND has suspicions with some individual files, and needs to follow up to maintain fair play in the industry and immigration policies. Still, the existing conditions lack valid legal arguments to completely ignore a true employment contract, so that the permit of the knowledge migrant can be instantly canceled..
In daily practice, the IND has taken this view even further so that knowledge migrants, who are not owners and even directors of the company in which they work are not considered employees because they can ‘independently set up their activities’. However, such freedom of an expatriated employee responsible for a start-up of a subsidiary, is the rule rather than the exception of any well-paid professional who only has to be held account to the parent company abroad. The IND now seems to have changed its understanding of these ‘independent’ knowledge migrants and considers them to be working in violation of their permit. This is extremely worrying for both this category of expats and for the service providers around them, who trusted their cooperation to be compliant under the regulations.
What does this mean for practice?
In general, we see very successful forms of cooperation in which the knowledge migrant functions at a high level and is making an important contribution to the Dutch economy. On the other side, we see that most payroll service providers are knowledgeable, vital administrative intermediaries and consultants so that their foreign employees can focus themselves on their business, work and expertise. It is most important that the first group now realizes that a thorough check may be needed to prevent problems with the IND or even the Inspectorates. And the second group would do well to monitor the current employment even better.
What can Maes Law do for you?
The fast-expanding law firm Maes Law B.V is ideally specialized in corporate migration law and now has offices in Breda, Eindhoven and Rotterdam. The attorneys-at law are not just legal experts, they know business and are capable to act as the sparring partner of their corporate clients about efficient, practical and (legally) sound solutions. Maes Law has over twenty years of experience with complex regulations and the daily dynamics of enforcement. We have developed unique tools, such as HSM audits, to optimally and proactively advise and guide our clients. In most cases, Maes Law offers a fixed fee so that clients are not faced with any surprises, and we can fully focus on delivering top work.
Feel free to contact us without obligation for an initial assessment, of course guaranteed confidentially, whether you are sufficiently compliant and are prepared for the consequences of the ever-increasing standardization and enforcement by the implementing authorities.