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1 Memorandum Payroll tax, social security and key items relating to conditions of employment in the Netherlands 2018 Introduction ESJ Financial Engineering is a medium-sized professional partnership, serving domestic and non- Dutch clients with a full spectrum of tailored audit, accounting and financial support and advisory services of accountants, tax consultants and other specialists. In the Netherlands, the organisation has 5 offices and some 175 staff. ESJ Financial Engineering is a member of Allinial Global, a worldwide network of independent Accounting and Tax advice companies in many countries. About this memorandum The Netherlands has an extensive and complex body of tax, social security and labour laws. The complexity of the system is due to the fact that the current legislation was introduced over a period of many years and therefore consists of a large number of different Acts and regulations. As a consequence, many of the terms used in the various Acts are open to different interpretation. The implementation of the Acts has been delegated to a number of organisations, the most important of which are the Tax Department and the Employee Insurance Administration Institute (Uitvoeringsinstituut Werknemersverzekeringen-UWV). The role of the Tax Department will require no further explanation, whereas that of the other organisations probably will. The Employee Insurance Administration Institute is a non-profit-making organisation responsible for the administration of employee insurance schemes (see section 3). Another administrative body is the Social Insurance Bank (Sociale Verzekeringsbank), which is responsible for a number of National Insurance schemes (see section 2). This bank administers the benefits of present and future benefit claimants. Although the Social Insurance Bank operates as a commercial insurance business, it does so on a non-profit-making basis. The administration of a number of social security Acts has been delegated to the Regional Offices of the Social Insurance Bank. In such cases, the Employee Insurance Administration Institute is not involved, and contributions are collected by the tax authorities. Finally, the Health Insurance companies are in charge of implementing the Health Care Insurance Act and the Act on long-term Health Care. Dutch social security schemes can be divided into two types of insurance: national insurance and employee insurance. National Insurance is applicable to all residents of the Netherlands and to certain groups of people who work in the Netherlands (see section 2). Employee insurance is applicable only to people who are or have been in paid employment (see section 3). In view of the complexity and diversity of the legislation, this memorandum cannot attempt to do more than provide a concise summary of the most important points. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 1 of 28

2 Inhoud 1 Payroll tax / social security Payroll tax Obligation to withhold payroll tax Obligation to remit Employee Insurance contributions %-facility 5 2 National Insurance General Old Age Pensions Act (AOW) Surviving Dependants Act (ANW) Act on Long-term Health Care (WZL) General Child Benefits Act (AKW) Collection of National Insurance contributions Health Care Insurance Act (ZVW) 9 3 Employee Insurance Sickness Benefits Act (ZW) Unemployment Benefits Act (WW) Work and Income According to Employability Act (WIA) Collection of Employee Insurance Contributions Working Conditions and Occupational Safety Service 13 4 Expense allowances and other benefits 13 5 Key items relating to conditions of employment and labour law Minimum wage and minimum holiday allowance Payment of holiday allowance Regulations governing conditions of employment Pension Funds 17 6 Termination of employment contracts Termination of fixed-term contracts Termination of employment contracts for an indefinite period of time Reasonable grounds Dismissal permit Termination by court and appeal Prohibition of dismissal Period of notice Termination by mutual consent Transition allowance Re-enlistment condition in case of dismissals for economic reasons 23 7 Significant conditions of employment and labour law provisions Trial period Leave days Public holidays Working hours Payment of salary during illness Payment upon death of the employee Non-competition clause 27 8 Payroll accounting services and advice on conditions of employment 27 Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 2 of 28

3 1 Payroll tax / social security 1.1 Payroll tax The taxation of employees salaries (as defined by law) from current or former employment is governed by the Payroll Tax Act This Act governs not only income from employment but also income received when an employee is temporarily or permanently unable to work, for example social security benefits. Payroll tax is levied on all benefits received from current and former employment. This includes wages and salaries paid in money and also benefits in kind and certain entitlements (rights) arising from the employment. Although payroll tax is an independent tax, in practice it often serves as an advance payment of income tax. Income tax is levied if certain criteria are satisfied, for example if the employee enjoys a secondary income and if certain deductions are made (such as mortgage loan interest). When the final income tax calculated is more than a certain amount (at this moment 46) an additional income tax assessment will be imposed. If an income tax assessment is raised, payroll tax withheld from wages or salary is deducted from the assessment as an advance payment. 1.2 Obligation to withhold payroll tax Every business that is registered in the Netherlands and employs natural persons for the performance of work in the Netherlands is, in principle, obliged to withhold payroll tax. This means that an employer must fulfil all conditions and requirements imposed on him by the Payroll Tax Act 1964 and the related implementation regulations and decrees. He must also observe countless other laws and legal requirements with regard to taxation. Even if the business s registered office is not located in the Netherlands, the employer may still be obliged to withhold payroll tax if there is a permanent establishment or permanent representative in the Netherlands. A part of the social security premiums (National Insurance Contributions / NIC) is withheld on the gross salary of the employee in combination with the payroll tax. If there is neither a business nor a permanent establishment or permanent representative, there is no obligation to withhold payroll tax (and no NIC too). Such a situation may arise where sales staff/representatives work for an employer registered outside the Netherlands. Such employees are assessed in Income Tax as to their income in so far as they are liable to pay tax in the Netherlands. A different situation is given in case of hiring out employees from outside the Netherlands to an employer inside the Netherlands. In such case the foreign formal employer is deemed to have a permanent establishment for only the payroll tax. If the employee is also taxable (often) than payroll tax has to be withheld and paid to the tax office. The employer may also have an obligation to withhold payroll tax from the salaries of employees who work outside the Netherlands but who reside inside the country. The Netherlands, like many other countries, has concluded international conventions for the avoidance of double taxation. If a Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 3 of 28

4 tax convention has not been concluded with a particular country, the Netherlands will apply its own regulations for the avoidance of double taxation. The international aspects of taxation will not be considered further here since they are beyond the scope of this memorandum. One of the most important consequences of this obligation is that the employer must withhold payroll tax from the salaries he pays to his employees. Payroll tax is paid by the employees, but the employer is required to withhold it and will be held responsible for doing so. The employer must check every payment and benefit given to employees as to whether it attracts payroll tax. Sometimes also expense allowances or providing matters may be considered as taxable wages. In practice, many problems arise since it is often difficult for an employer to determine whether a particular emolument attracts payroll tax or not. This is due to the complexity of the legislation and regulations. It is therefore exceedingly important to determine which payments and benefits are subject to payroll tax as soon as an employee takes up employment. The Tax Department may check whether the employer has correctly fulfilled his obligations. If he has not, an additional tax assessment will be raised for up to the previous five years, which the employer can in theory recover from the employees, but in practice this will often be difficult if not impossible to achieve. If there is an obligation to withhold payroll tax, there is also an obligation to withhold National Insurance Contributions (see section 2), which are deducted as a single amount at the same time as the payroll tax, provided the employees are subject to Dutch social security legislation. If there is a statutory obligation to make withholdings, the employer may be designated as the withholding agent whether or not he makes a request to that effect. The ability to use certain facilities is sometimes required for a withholding agent to be created by means of designation. If an employer is voluntarily designated as the withholding agent, however, he is required to fulfil all the attendant obligations. The withholding of payroll tax and National Insurance Contributions should take account of the employee s personal tax credits. In principle, the amounts of the tax credits for payroll tax purposes are based on the income of the employee. The higher the income, the lower the tax credit and the lower the income, the higher the tax credit. However, as one of the tax credits is also based on a percentage of the income, this tax credit may be lower in the case of small income. The maximal personal tax credit for payroll tax purposes for high income (over 68,508.-) is 0 (year 2018); for employees with a lower salary the credit may be higher, up to 5,514 (year 2018). Depending on family composition, income, etc. additional tax credits are possible, but these can only be claimed in the personal income tax return of the employee. The tax rates are as follows. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 4 of 28

5 Payroll/income tax and National Insurance rates in 2018 (individuals younger than 66) Taxable income more than But not more than Tax rate Rate National Insurance contributions Total rate Tax amount on the total of the brackets ,90% 27,65% 36,55% ,20% 27,65% 40,85% ,85% 40,85% ,95% 51,95% After the calculation of tax, the tax credit has to be deducted yet. 1.3 Obligation to remit Employee Insurance contributions As soon as an employer, whether registered in the Netherlands or abroad, employs staff in the Netherlands or has staff work for him in the Netherlands, he qualifies as an employer for the purposes of employee insurance (see section 3). For employee insurance, therefore, it is not necessary for the employer to be a registered company in the Netherlands or to have a permanent establishment or permanent representative in the Netherlands. Pursuant to international conventions (such as the EC regulation on social security), however, employees may be insured elsewhere, for example if they are temporarily assigned to another country. If a social security convention has not been concluded with a particular country, Dutch social security legislation will be applicable with only a few specific exceptions. If an employer qualifies as an employer for employee insurance purposes, he is required to remit employee insurance contributions and Health Insurance contributions to the Tax Office for his employees in the Netherlands. To this end, he must notify the Tax Office that he is an employer (registration). Social security legislation governs what part, if any, of the contribution remitted by the employer is to be withheld from the employee s salary (at this moment all employee benefits insurance premiums are paid by the employer) %-facility The Dutch tax system provides a special tax facility to employees (expats) who have been assigned from abroad, which is known under the name of the 30%-facility. Under the 30%-facility the employer can pay the employee a separate tax-free allowance which is at maximum equal to 30% of the total remuneration (salary and the tax-free allowance) received from employment. Generally speaking this means that if the total remuneration amounts to 100, the salary is (roughly) set at 70 and the maximum tax-free allowance can be set at 30. This facility can be valid for 8 years. Periods lived or stayed in the Netherlands in the 25 years before arrival in the Netherlands (short vacations and family visits exempted) are deducted from the 8 years. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 5 of 28

6 The Dutch government intends to reduce the duration of the 30% ruling from 8 years to 5 years. This will possibly take effect from To apply for the 30%-facility roughly the following conditions have to be fulfilled: the employee has to be recruited from abroad or the employee has to be assigned to the Netherlands; the employer has to be a wages withholding tax agent in the Netherlands or has to be registered voluntarily as such; the employee has to have specific expertise which is not or only scarcely available on the Dutch labour market. As from 2018 the employee should have a taxable income of at least (excl. the 30% allowance). The check on being scarcely available on the Dutch labour market, will only be done when the in general the income level of the given profession is above this amount for almost the whole group with the same profession; the employee should have lived at least 2/3 of the period of 24 months (so 16 months) before the start of the employment in the Netherlands, in a distance of more than 150 kilometres (radius) from the nearest Dutch boarder. both employer and employee have to agree in writing on application of the 30%-facility ( statement of exempt allowances ); the 30%-allowance has to be paid out separately together with the taxable salary payments. A special clause has to be included in the employment agreement, or in a separate annex to it, which makes it possible that the original gross salary is legally separated in a lower gross salary and a 30% expense allowance. To obtain the 30%-facility from the start of the employment in the Netherlands, the application has to be filed within four months of the employee s arrival in the Netherlands. ESJ has the necessary expertise to take care of the application of the 30%-facility for you and your employee. 2 National Insurance In principle, all residents of the Netherlands and persons subject to Dutch payroll tax in respect of work performed in the Netherlands are covered by National Insurance legislation. International conventions, however, may permit exceptions to this national rule. Some National Insurance schemes (such as old-age pension) end when a person turns 67 years of age. Since the age of 67 was introduced recently in law, there is a transitional arrangement whereby the age at which a person becomes entitled to old-age pension from the government, always moves a few months during time. The following acts govern National Insurance: General Old Age Pensions Act (AOW) Surviving Dependants Act (ANW) Act on long-term Care (WZL) General Child Benefits Act (AKW) Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 6 of 28

7 2.1 General Old Age Pensions Act (AOW) Object Provide an old age pension for those reaching the age of 67 years and 3 months. As from 2013 the age is increased by 1 month, from 2014 by 2 months and from 2015 by 3 months, and the following years even more, which in due time will result in a pensionable age of 67 plus 3 months. Administration Administration is in the hands of the regional offices of the Social Insurance Bank. The Tax Department collects the National Insurance contributions. Benefits A basic pension generally linked to the net minimum wage. Pension rights are reduced at a rate of 2% for each year of non-coverage between the age of 15 and 67. Further, a holiday allowance is paid once a year. 2.2 Surviving Dependants Act (ANW) Object Insure an income-related benefit for certain surviving dependants. Administration Administration is in the hands of the regional offices of the Social Insurance Bank. The Tax Department collects the National Insurance contributions. Benefits An income-related benefit (surviving dependants benefit) of up to 70% of the statutory minimum wage for: surviving dependants with an unmarried child younger than 18 years; surviving dependants who are incapacitated for work; surviving dependants born before 1 January Surviving dependants are widows, widowers and the remaining partner from a cohabitation arrangement. Orphans may be entitled to an independent benefit subject to age. Those entitled to an orphans benefit as from the age of 16 years must satisfy certain conditions. The surviving dependants benefit and the orphans benefit as from the age of 16 years are income-related. Income from and related to employment affects the amount of the benefit. 2.3 Act on Long-term Health Care (WZL) Object Insure all persons against the risk of exceptional medical expenses resulting from long-term illness and/or occupational disability, and for medication and appliances Administration Administration is in the hands of: accredited health insurance companies civil servant health insurance organisations Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 7 of 28

8 Benefits Stay of patients in healthcare facilities Caring for frail elderly and disabled Permanent nursing Comprehensive care (complete packages of care for very frail persons) 2.4 General Child Benefits Act (AKW) Object Provide a benefit for the maintenance of children, the amount being based on their ages. For this insurance no premium is due. Administration Administration is in the hands of the regional offices of the Social Insurance Bank. Benefits After the birth of every child, an application is made for child benefit (or an increase in the existing child benefit) by the person caring for the child (usually the mother). The amount of the benefit is automatically transferred to a specified bank account at the end of every quarter. To be eligible for child benefit, a number of conditions must be satisfied on the first day of every quarter. The table below show the child benefit at 1 January 2018 per child and per quarter. Basic amounts of child benefit Age 0-6 years 201, years 244, years 287,21 In principle, children aged 18 years and older do not receive child benefit. If they are still studying, a study finance loan is possible. 2.5 Collection of National Insurance contributions National Insurance contributions are collected together with payroll and/or income tax. For 2018, the total combined tax/contribution rate on the first two income brackets amounts to % and 40.85%. No contribution need be paid for AKW. The premiums are for the account of the employee. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 8 of 28

9 The breakdown of the total combined tax/contribution rate is as follows: Persons younger than 65 years+ 9 months % Persons aged 65 years+ 9 months and older % Maximum assessable income per annum Euro 1st bracket 2nd bracket 1st bracket 2nd bracket AOW ,994 ANW ,994 WZL ,994 Tax * ,142 (1st bracket) Tax * ,852 (2nd bracket) Total * For income above 33,994 only tax is due in two more brackets of 40.85% and 52%. National Insurance contributions are collected in two ways, namely: by the withholding agent (employer/benefit agency); by assessment of the insured. These collections are combined with payroll and/or income tax into a single collection or assessment. The withholding agent remits the payroll tax/national insurance contributions by means of a payroll tax/contributions return. Within a month of the relevant tax period (a month), the withholding agent submits the (electronic) return to the Tax Department. The amount payable on the return is also to be paid within the same term. An income tax/national insurance assessment is raised in respect of income not paid by the withholding agent. Tax and contributions may also be collected by means of assessment if other income is earned apart from income from employment (paid by the withholding agent). 2.6 Health Care Insurance Act (ZVW) The Health Care Insurance Act (Zorgverzekeringswet) is neither a National Insurance, nor an employee insurance. As the insurance is obligatory to all people who are insured for the Long-Term Care Act (WZL) we included the information in the chapter of National Insurances. Object Guarantee effective medical care Administration Health Care Insurance companies and for certain special groups of insured persons abroad, The Care Institute Netherlands. Eligibility All citizens of the Netherlands who are insured for the Long-Term Care Act (WZL). Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 9 of 28

10 Special groups residing outside the Netherlands without employment income or social security income, may receive Health Care from the local organisations at expense of the Dutch Health Care system. Benefits These include: free medical care (including hospital treatment for a maximum of 365 days); medication, medical assistance from a general practitioner and specialist (not a psychiatrist); obstetric help and maternity care; certain dental treatment (restricted); rehabilitation, transport of sick persons, medical appliances; Premiums Premium is partly paid to the Health Insurers (fixed premium dependent on the package insured) by the insured persons themselves (children under the age of 18 are insured free of premiums) and next to that an Income related premium prescribed by law is paid to the Tax Office. For employees for which the employer is a withholding agent, the income related premium is payable by the employer. The premium amounts to 6.90% of the gross income, to a maximum income of 54, The premiums have to be paid by the employer to the Tax Office on the (electronic) Payroll tax return. 3 Employee Insurance Only employees within the meaning of the relevant social security acts are insured. An employee is defined as: a person who has a civil-law contract of employment with an employer; a person whose relationship with a principal is economically equal to a contract of employment provided a number of other conditions are also satisfied. This type of employment relationship is also known as a notional employment. The following acts govern Employee Insurance: Sickness Benefits Act (ZW) Unemployment Benefits Act (WW) Work and Income According to Employability Act (WIA) 3.1 Sickness Benefits Act (ZW) Object Pay a part of an insured person s wage/salary if he is unable to work and is not entitled to wage/salary from the employer during sickness (See section 7.2.3). Administration Administration is in the hands of the Employee Insurance Administration Institute (UWV). Benefits The amount of the benefit payable to the claimant (see below) during the period of sickness is equal to 70% of the normal salary for a maximum of 104 weeks. The benefit is maximised to 70% Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 10 of 28

11 of a daily wage of (2018) and is paid over 5 days a week. There is no entitlement to benefit during the first two days of sickness, if agreed in employment contract or Collective Bargaining Contract. Unless otherwise agreed, the employer is usually responsible for the payment of salary on such days. Due to the Sickness Benefits Act and the Netherlands Civil Code concerning the payment of salary, only certain employees are eligible for a benefit. These safety net benefits are payable in the following cases: Employees whose (limited) contracts of employment end by operation of law during their sick leave, for the period after the ending of the contract. Persons employed under stand-by contracts, flexible contracts, zero-hour contracts, etc., as long as they have no right to receive sick pay from the employer. Temporary staff and similar categories of staff considered to have a notional employment. Post-employment benefits for people falling ill within a short period after the ending of their employment, without having a new employment. Sick employees and insolvency of the employer. Unemployed sick. Pregnancy and maternity leave. Return to work of partially or formerly occupationally disabled employees. Organ donors. 3.2 Unemployment Benefits Act (WW) Object Pay a part of the wage/salary during periods of unemployment for which the employee is not to blame. Administration Administration is in the hands of the Employee Insurance Administration Institute. Benefits Where the employee cannot be blamed for the unemployment, unemployment benefit can be received subject to certain conditions. There is one type of benefit: a salary-related benefit ; equal to 70% of salary paid for a maximum period of between three months and 38 months. The first two months the benefit is 75%. To qualify for the benefit, the claimant must have worked under a contract of employment for at least 26 weeks of the 36 weeks prior to the unemployment (known as the reference or number-ofweeks criterion). An income-related benefit can be received for a variable period if the reference criterion (see above) is satisfied and the claimant has received a salary on at least 52 days per annum in at least four of the five years prior to the year of unemployment (known as the career history or numberof-years criterion). Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 11 of 28

12 The duration of the salary-related benefit is determined by the career history, i.e. the number of years in which the above career history criterion is satisfied since 1998 and the number of years since the claimant s 18th birthday and up to and including the year Per year the unemployed employee receives 1 month of unemployment benefit with a maximum of 38 months. As from 1 January 2016 the maximum number of months is step by step decreased to 24 months maximum, to be reached on 1 April The maximum salary for the calculation of the salary-related benefit amounts to (2018) per day (five days per week). When the maximum period of the benefit has ended the claimant can under conditions receive financial assistance from the municipal social services department. 3.3 Work and Income According to Employability Act (WIA) Object To provide benefits to wage earners who are incapable of performing suitable work after 104 weeks of occupational disability. Administration Administration is in the hands of the Employee Insurance Administration Institute. Benefits Benefits are based on a percentage of the daily wage/salary depending on the degree of occupational disability. The benefits are payable if an employee is between 35% occupationally disabled and 80 to 100% occupationally disabled. Benefits are subject to a ceiling based on a maximum daily wage/salary of (2018) per day (five days a week). Employees who are occupationally disabled for 80% or more receive a benefit of 70% of the last earned salary (before start of illness). Employees who are occupationally disabled between 35% and 80%, receive a partly benefit and may receive after a certain period a benefit that may be higher or lower dependent on the income they earn with their remaining occupational abilities. 3.4 Collection of Employee Insurance Contributions General The procedure for paying contributions to the Tax Office has been laid down in their regulations. The premiums for employee insurances are paid on the (electronic) Payroll Tax return to the Tax Office together with the Payroll tax and National Insurance Contributions (if the employer is a withholding agent). The premiums are to be paid monthly in arrears (within a month after the salary month). Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 12 of 28

13 Contributions Employee Insurances 2018 Employee Insurance premiums: Type of insurance Total % Employer % Employee % Upper earnings limit per day Euro 1 WIA fixed WIA/ZW-variable WW fixed WW variable A calendar year consists of 260 days for social security purposes; upper earnings limit per annum WW/WIA: 54, The WIA-fixed and the WW-fixed percentage is equal for all employers. 2 The WIA/ZW-variable percentage mentioned is dependent on the long term disability in the company and is fixed by the Tax office each year. 3 The WW-variable rates (Wachtgeldverzekering) vary per industrial sector. The rate given above is the estimated average. 3.5 Working Conditions and Occupational Safety Service The Working Conditions and Occupational Safety Service (WCOS-Service (Arbodienst)) is a private organisation that takes care on behalf of the employer of checking, monitoring and, where possible, reintegrating sick employees. The task of the WCOS-Service will be either basic or more extended depending on the contract the employer enters into with the WCOS. There are several WCOS-Services active in the Netherlands, and the employer is free to choose one of these. It is obliged by law to join such a WCOS-Service or to contract a specialised WCOSdoctor. The WCOS-Services have an important role to play in case of an employee s long-term occupational disability and the employer needs the medical assistance. The WCOS occupational physician is leading during the illness of the employee. We therefore always strongly advise to join a WCOS-Service. Often this can be done in combination with a Sick Pay Insurance (see chapter 7.2.3). If an employer is not affiliated with a WCOS-Service, a fine can be imposed. An employer registered in the Netherlands is also required to prepare a Risk Statement of employees working conditions and have it assessed by the WCOS-Service. 4 Expense allowances and other benefits As a lot of allowances and benefits are possible, it would go too far to mention them all with their possible fiscal consequences. However in short we ask your attention for the most usual items mentioned hereinafter. An allowance to compensate nominal premiums for Health insurances and additional insurance, is taxable wage; Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 13 of 28

14 An allowance to compensate premiums for disability insurances (not arranged and in the name of the employer), is taxable wage; Any allowance for a pension plan that is not arranged and in the name of the employer, is to be considered as taxable wage; the employee might deduct the premiums he paid in his Income tax return; Mileage can be paid tax free to a maximum of 0.19 per kilometre; the exceeding amount is taxable; all costs are included in this amount, also parking fees and toll- and ferry fees; For business mileage the employee has to deliver at declaration a mileage report, mentioning all business trips separately, with full addresses, start and end of the Odometer per trip (example file is available). If you pay next to the mileage (or perhaps costs of petrol) a taxable Car allowance, you better might pay this as a personal allowance, as the tax office may consider that the combination of the Car allowance and payment of petrol or mileage compensates all costs of the private car of the employee (including private use) so that based on Dutch case law it is for tax reasons considered to be equal to a company car; If the employee has the benefit of a company car, the private use of the car has to be taxed in the payroll (basically 22% - for cars taken into use on or after of the Dutch list price of the car (VAT included)). Lower percentage is possible, dependent on the CO 2- emission of the car (electric vehicles). This fiscal addition in the payroll should only be left out if the employee provides a statement of the tax office regarding non-private use of the company car; In case of a company car, the parking, toll- and ferry fees may be paid tax free, as well as the cleaning costs of the car. Please let the Dutch tax adviser or the payroll provider screen your employment benefits for your employee(s) in the Netherlands, to avoid possible tax corrections afterwards with penalties and interest claims. As from 1 January 2015, a new tax system for expense allowances and wage in kind has been definitely introduced in the tax system of the Netherlands. Separate information about this Work Expense Facility is available. This is especially important if the company is (mandatory or voluntary) a withholding agent for payroll tax purposes. 5 Key items relating to conditions of employment and labour law 5.1 Minimum wage and minimum holiday allowance Pursuant to the Minimum Wages and Minimum Holiday Allowance Act (MWA) employees are entitled to be paid a minimum wage by their employer. In general, minimum wages are adjusted semiannually to wage developments unless this would contravene legal provisions. Minimum wages apply to all employees aged 22 years and older. For employees younger than 22 years, a lower minimum youth wage applies. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 14 of 28

15 Employees are also entitled to receive a minimum holiday allowance of at least 8% of the wage/salary paid by their employer and to any ZW and WW benefits to which they are entitled during their employment. The holiday allowance may be restricted to 8% on 3 times the gross minimum wage, in the employment agreement (not usual). Within the meaning of this Act, wage/salary is understood to mean: monetary income from employment. Not regarded as wage/salary for the minimum wage/salary are: holiday allowances; profit distributions; year-end bonuses ( 13th month, etc.); gratuities for special occasions (public holidays, anniversaries, etc.); benefits based on entitlements to one or more future or conditional payments (e.g. savings and pension schemes and social security benefits in so far as employer contributions are payable); allowances to defray necessary employment-related expenses; salary set aside on a blocked account under an employee savings scheme. Within the meaning of the MWA, salary does not include the free use/benefit of: board and lodging; meals; laundry, gas, water and electricity; a house; clothing for a child working in his parents business; accommodation on board vessels, dredges, fishing boats and in caravans for fairground workers. Age % of the Minimum wage Per month Per week Per day 22 years 100% 1, years 85% 1, years 70% 1, years 55% years 47.50% years 39.50% years 34.50% years 30% Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 15 of 28

16 Minimum wage 1 January 2018 The minimum wages are applicable in respect of the working hours customary in the business. If fewer than the customary hours are worked, the amount is reduced proportionately. The statutory minimum wage is applicable to all employees and who have a civil-law contract of employment. The minimum holiday allowance is 8% and is due over the total income from employer with exception of the items mentioned above under Not regarded as wage/salary for the minimum wage/salary. An employer is not required by law to pay a minimum wage to young employees who are still in part-time compulsory education, in respect of the compulsory education days. Public-law legislation or a Collective Bargaining agreement (CAO) may stipulate that employees are not entitled to a holiday allowance or to only a lower amount. The total annual wage/salary, however, should be at least 108% of the minimum wage within the meaning of the MWA. If the wage/salary agreed by the employer and employee exceeds three times the minimum wage, an agreement in writing may stipulate that employees are not entitled to a holiday allowance or are entitled to a lower amount. Pursuant to the MWA, the minimum holiday allowance is subject to a ceiling equal to the holiday allowance based on a wage/salary (as defined in the MWA) of three times the minimum wage (usually not applied). If an employer pays less than the applicable minimum wage and holiday allowance, he may receive a penalty that can accrue up to 12,000.- per employee concerned. 5.2 Payment of holiday allowance The holiday allowance should be paid in June (but is often done in May) in so far as it has accrued on the wage/salary and on ZW and WW benefits due and payable up to and including 31 May of the year in question. Pursuant to public-law legislation or agreement in writing, it may be paid at a different time provided payment is made at least once per calendar year. It is thus possible, for example, to agree that the holiday allowance be paid monthly (subject to the relevant CAO [Collective Bargaining Agreement] provisions). Most employers pay the holiday allowance in May. Upon termination of the employment, the employer is required in any event to pay the holiday allowance accruing to the employee up to that date. Any conditions contrary to provisions laid down in or based on the MWA are void. Holiday allowance may be left out or restricted, if the gross salary of the employee is higher than 3 times the gross minimum wage. At present this means a gross monthly salary of more than 4,734.- per month. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 16 of 28

17 5.3 Regulations governing conditions of employment Conditions of employment can be regulated in various ways in the Netherlands. The Netherlands Civil Code contains a number of provisions governing, for example: the trial period; the right to continued payment of salary during sickness and in certain other circumstances; the accrual of holiday entitlements and taking days off; the time of payment of wage/salary; the termination of employment in various ways. Some provisions may be departed from by written individual contract of employment, but often this is only possible by means of a Collective Bargaining Agreement (CAO) or pursuant to a regulation of a government body. A CAO is an (Collective bargaining) agreement on terms and conditions of employment for large groups of employees that is very common in the Netherlands. CAO s have been concluded between employers federations and labour unions in major sectors of industry (e.g. the engineering and construction industries). At the request of the bargaining parties, the Minister can declare the CAO generally binding, which means that all employers within the scope of the CAO are legally bound to apply the collective agreement to their employees. Most CAO s contain minimum provisions, which imply that the conditions of employment may be departed from in favour of the employees. There are also CAO s, however, that contain both minimum and maximum conditions in order to avoid unfair competition. If no CAO applies, the conditions of employment are often agreed upon with employees in writing. Although an oral contract of employment is equally possible and legally valid, it is advisable to put the employment conditions in writing in order to avoid problems in the future as to the exact agreements between the parties. Some conditions need the written contract (e.g. probationary period and non-competition clause). Subject to certain legal conditions and provisions to be observed at all times, the employer and employee are free to determine the conditions of employment. It is therefore advisable to consult a specialised adviser when drawing up a contract of employment. ESJ Accountants & Tax Consultants have the necessary expertise to assist you. 5.4 Pension Funds The majority of employees in the Netherlands enjoy the right of building up a pension additional to the General Old Age Pensions Act. While this is often on a voluntary basis, in many sectors of industry, membership of a pension fund is compulsory. It is therefore very important to check whether such a compulsory Pension Fund applies to the employees in the Netherlands, so as to avoid a retroactive pension premium assessment (up to 5 years). The most pension funds are only compulsory applicable if the employer is situated in the Netherlands, or has a permanent establishment in the Netherlands, but there are exceptions. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 17 of 28

18 6 Termination of employment contracts The legislation regarding fixed term employment contracts and termination of employment contracts in general has been changed rigorously in The legislation is rather complex and we must advise you to contact a lawyer to advise you, or take contact with our office. We also can advise you on this subject. Hereinafter we will explain the main rules. 6.1 Termination of fixed-term contracts Contracts entered into between employers and employees will be either fixed-term or openended. This distinction is very important for the termination of the contract. A fixed-term contract of employment is entered into for a specified period of time (e.g. one year) or, for example, for the duration of a project or during the absence of another employee. If the resolutive condition is fulfilled, i.e. the contract has expired or the project has been completed, the contract of employment will end by operation of law, without any formalities needing to be observed. The only but important obligation for the employer is to inform the employee in writing at least one month before expiration of the contract, whether the contract will end or will be extended and if so, under what conditions. If that is not done or not done in time, the employer may have to pay one month s salary to the employee as a penalty, if it is claimed. Employers may agree upon three consecutive fixed-term contracts of employment, provided the total period of the three contracts does not exceed 24 months and the periods, if any, separating the contracts are shorter than six months. These separation periods do also count for the 24 months. If between contracts there is a period of longer than 6 months, during which the employee did not work for the employer (also not through another company or employment agency), the chain of contracts can start again with a first contract. If the contract is open-ended, it will not end automatically, with exception of reaching the age the employee receives the right on General Old Age Pension, if so agreed in the contract. Formalities will need to be observed to terminate the contract in other situations. 6.2 Termination of employment contracts for an indefinite period of time Reasonable grounds To terminate an open-ended contract, or a fixed-term contract before the expiration date, there must be a reasonable ground as given in the Dutch Civil Code. These reasonable grounds are explicit and limited: 1. job cuts as result of company related economic reasons, or termination of the company activities or of a department within the company; 2. after 104 weeks (long-term) disability); 3. frequent and disruptive sick leave; Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 18 of 28

19 4. incapacity of an employee to perform the job he was hired for (other than as result of illness) provided that the employer informed the employee in due time and that the employee had enough time to improve himself and that the incapacity is not caused by the lack of care of the employer to educate the employee or to bad labour conditions; 5. blameworthy acts or omissions of the employee (misbehaviour), so that the employer can not reasonably be expected to continue in the employment contract; 6. the refusal of the employee to perform the contracted work due to a serious conscientious objection, provided that it is believed that the agreed work can not be performed in a modified form; 7. a disrupted employment, so that the employer can not reasonably be expected to continue in the employment contract; 8. other than the aforementioned conditions, that are such that the employer can not reasonably be expected to continue in the employment contract The grounds for termination can not be combined; one of the reasons must be chosen, or if more reasons apply, each separate reason must be sufficient for dismissal. The grounds mentioned under 1 and 2, must (mandatory) be submitted for assessment and for obtaining a dismissal permit to the legal department of the UWV (Employee Insurance Administration Institute). All other grounds must (mandatory) be submitted for assessment and termination of the contract to the Court Dismissal permit An application for permission to dismiss an employee is sent to the legal department of the UWV and must be done by completing special prescribed forms with questions. Also certain documents may be required to send with the application forms. After hearing (in writing) both parties (in one or two rounds) a decision is made to give or not give permission to the employer to dismiss the employee. Once the employer is granted permission, notice must be given within the period that the permission is valid (4 weeks) and a term of notice must be respected during which the salary must be paid. The whole procedure (excluding term of notice) may take about 4 weeks, and some times longer. A dismissal permit is not required for a director appointed in terms of the Articles of Association (i.e. a director appointed by the shareholders meeting and registered as such with the Trade Register of the Chamber of Commerce). The shareholders in general meeting may dismiss the director as stipulated in the Articles of Association of the company. The term of notice has to be observed, however. Dependent on the employment agreement, it is not always sure that if a person is dismissed as statutory director, also his employment agreement ends. It is better to mentioned this in the contract Termination by court and appeal In case of a termination by Court for the reasons mentioned under as given under points 3 to 8, the Court sets the termination date, observing the notice period. The Court has to observe the exact same grounds for termination as the UWV. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 19 of 28

20 The employee or the employer, who is not satisfied with the fact that the UWV (not) granted a dismissal permission, can appeal to the Court. Also after the Court s judgement a party may appeal to the Court of Justice and after that appeal to the Supreme Court. The first verdict of the Court is however not suspended and is put into effect. This can only be corrected after judgement of a higher court and after appeal is not possible anymore. Appeal to the Supreme Court may take several years. At this moment it is still unclear what the consequences may be if the Court of Justice or the Supreme Court decides in another way than the Court. On that point there is no case law yet Prohibition of dismissal In certain circumstances it is forbidden to terminate a contract. An important prohibition is, that during the first two years of an employee s disability, a contract of employment may not be terminated. This does, however, not apply to an expiring fixed-term contract of employment, whether or not extended, as long as it is within a total period of 24 months and is not the 4th or higher contract. A fixed-term contract therefore also ends by operation of law during illness. Also giving notice to terminate the employment contract is forbidden during maternity leave and during 6 weeks after the maternity leave. There are more prohibitions that are not mentioned here, for instance for employees that are member of a Works Council or in case an employee refuses to work on Sundays Period of notice If notice is required to terminate a contract of employment (in cases that must be assessed by the UWV), it must be given after a dismissal permit is obtained and the applicable period of notice must be observed. The minimum statutory period of notice to be observed by the employee is one month ending at the end of a calendar month. After each period of five full years of service by the employee, the period of notice for the employer increases with one month, with a maximum of 4 months. Service years Notice period 0 5 years 1 month 5 10 years 2 months years 3 months more than15 years 4 months The time between receipt of the dismissal application and the decision of the legal department of the UWV, can be deducted from the notice period (special way of calculation), but at least one month should remain. The period of notice for an employee in case of resignation is one (calendar) month. The employer and employee may agree in writing to a different period of notice for the employee, but the period for the employee may not be longer than 6 months and in case of extending the standard period of notice for the employee, the period for the employer will always be twice that for the employee. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 20 of 28

21 It is common for indefinite employment contracts to end ( if included in the employment contract) when the employee reaches the age from which he can receive benefit from the Old Age Pensions Act (AOW). That age is at present standard 67 years and 3 months, but there is a transitional arrangement for older employees as result of which the benefit cab starts on an earlier age. Employment after the age at which the employee is entitled to benefits from the Old Age Pensions Act is possible. Since some regulations (Employee Benefits Insurance for instance) no longer apply after this age, however, it is advisable to enter into a new contract with special conditions. Such contracts also have advantages for the employer Termination by mutual consent If there is agreement between the parties, of course, the contract of employment may be terminated by mutual consent without the need to observe procedures with the UWV or the Court. This is possible without the employee losing his Unemployment benefits, as long as the action comes from the employer. If also the term of notice is considered in the agreement, the employee will not lose any unemployment benefits. If not, the employee will lose benefits for the duration of the notice period. It follows that in such cases, both parties often agree to a redundancy payment in writing (important). The transition compensation (see chapter 6.3) is not officially due, as the parties agree themselves on the conditions of the termination by mutual consent. It may, however, be clear that the employee will always claim at least the amount he would receive as transition compensation if the termination would have been done through usual channels. This solution of termination by mutual consent is most popular at present, as it avoids procedures. Main point is that employer and employee can come to an agreement, mainly about the redundancy payment. The advantage of this solution is also that in the agreement is included that both parties grant each other full discharge for any claim out of the employment or as result of termination of the contract. Also lodging appeal can be ruled out. There is one extra point to observe. The employee has, after signing the agreement, the legal possibility to revoke the agreement in writing within 14 days after the day the agreement is signed and without the obligation to give any reason for the revocation. The employer is obliged to inform the employee about that in writing (often included in the agreement). 6.3 Transition allowance Employers have to pay at termination of an employment (fixed-term or open ended) that have lasted at least 24 months, a transition allowance (severance pay). Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 21 of 28

22 Before this was not mandatory, but in practice a certain formula was used that resulted in a much higher amount than the transition allowance. If the total employment lasted less than 24 months (for instance 23 months and 2 weeks) the transition allowance is not due. The allowance for the first 10 years of service is equal to 1/6 of the present monthly salary for each full 6 month period that the employment contract has lasted (corresponding to 1/3 of the monthly salary per year of service) and equal to 1/4 of the monthly salary for each subsequent full 6 month period (which corresponds to 1/2 average month's salary per year of service after 10 years of service). For employees that are 50 years or older at the moment of termination and who have been in service of the employer for at least 10 years, a higher allowance is calculated: 1/2 of the average monthly salary for each full 6 month period for the years of service they had with the employer after the age of 50. This is a temporary rule that is valid up to , but is not applicable if the employer is a small employer, who had in the 2 nd half year of the preceding calendar year less than 25 (average) employees in service. The average monthly salary includes in proportion the holiday pay, end of the year gratuities, payment of overtime, target bonuses (average over 3 years) etc. Employer s costs, such as the pension premium, company car, social security premiums etc., are not included. The total transition allowance is maximized to 79,000.- (2018) or an one year s salary if the employee earns more than 79,000.- (2018). There is also temporary rule that restricts the transition allowance in case of dismissal due to company economic reason of a financial nature for the same small employers. The conditions to obtain this restriction are very hard to meet. The transition allowance is only due if the termination of the employment that lasted at least 24 months, is caused by the employer. So the allowance is among others not due in the following situations of termination of employment: the employee resigns; the employee refuses an extension of a fixed-term contract on the same or better conditions; the employment ends at reaching the age for the benefit of the Old Age Pensions Act, or later pensionable age; the situation where the employee is guilty of theft, embezzlement, fraud or other crimes, whereby he is unworthy of the trust of the employer; actions of the employee as result of which he seriously embarrassed the employer s trust whereby further continuation of employment can not be expected from the employer. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 22 of 28

23 6.4 Re-enlistment condition in case of dismissals for economic reasons There may be unforeseen circumstances as result of which the work attracts, after the dismissal of an employee who has been dismissed for economic reasons. The employer will want to attract potential staff for that. The re-enlistment condition should make sure that the employer sets a dismissed employee the opportunity to resume work, if the nature of the job is roughly the same as his job before. If necessary the employer should even offer supplementary job education. A concrete offer from the employer on his customary conditions is necessary. If the employer does not offer or refuses to make an offer, then this means that the penalty condition occurs: The dismissal will be cancelled retroactively. That means that the earlier termination on the basis of the previously granted dismissal is voidable as result of the absence of the necessary authorization. The law stipulates that the employee may request the court to annul the notice, or to grant him a fair compensation, if within 26 weeks after the decision by UWV or Court to end the contract, the employer employs staff to take the same job from which the worker has been fired and the employer has not previously made an offer as outlined above. The offer should also be made if the vacancy is at another office, than where the former employee worked. 7 Significant conditions of employment and labour law provisions This section considers a number of common employment conditions, some of which are compulsory. Departures from some of these conditions are permitted under a CAO and other arrangements are also possible. Our intention here is to provide a general overview. 7.1 Trial period A trial period may not exceed two months and must be explicitly agreed upon in writing with the employee. In case of a fixed-term contract for a period of less than 2 years, a trial period of one month is the maximum. Fixed-term contracts for 6 months or shorter may not contain a probationary period. Since a trial period is often too short for a proper assessment of the employee s performance, a fixed-term contract of employment is often concluded (e.g. for more than six months or a year), which can subsequently be extended, or replaced by an open-ended contract. During the agreed trial period, both parties are free to terminate the contract immediately and without notice, even during illness (but not because of it). CAO s may contain other provisions on trial periods and fixed-term contracts. 7.2 Leave days The entitlement to leave days accrues in the course of employment. In principle, leave day entitlements accrue for each working day. The statutory minimum number of leave days per annum is 20 for a five-day working week (per annum: 4 times the working hours per week). If the employee Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 23 of 28

24 works fewer than five days or works less than the usual working time in the company, the leave day entitlement accrues pro rata. The usual number of leave days in the Netherlands, however, varies from 23 to 30 or more per annum. The days above the statutory minimum are called extra-legal days. There are often special arrangements for senior employees, but that is on the decline as this can be considered as discrimination on age. The right to statutory leave days that have not been taken up, generally lapses after six months after the year in which the days accrued. Leave days accrued in 2017 will therefore lapse on 1 July 2018, if not taken. The employer may deviate from this legal stipulation, for instance to make the period for statutory leave days the same as for extra-legal leave days. Extra-legal leave day entitlements lapse after 5 years after the year of accrual. Extra-legal days accrued in 2016 will therefore lapse on 1 January If no special arrangement has been included in the employment agreement, legally, employee s leave days are taken up in consultation with the employer and, in principle, taking the wishes of the employee into account. The employer is also required to give the employee the opportunity to take days off. In practice, the employee is free to take days off, albeit in consultation with the employer, and the employer will refuse the employee s request for days off only for compelling reasons. In certain sectors of industry (e.g. the building industry), it is common practice for all employees to go on holiday at the same time and for the business to shut down. If this is applicable it is recommended to include this in the employment agreement. Also when the employer wishes to restrict the accrual of leave days, he can include specific arrangements in the employment agreement, by which the employer can indicate when leave days have to be taken, if the employee did not take these by himself within a given period after the year of accrual. Between indication and taking the leave days a reasonable period should be given Public holidays Apart from the vacation days mentioned above, employees need not work, but are usually entitled to full wage/salary, on public holidays (in so far as they do not fall in the weekend). Public holidays in the Netherlands are (2018): New Year s Day, Easter Monday, Ascension Day, Whit-Monday, National Holiday (April 27- also called the King s day), Christmas Day and Boxing Day. Although not a public holiday, many companies (particularly offices) are closed on Good Friday. Many companies are also closed on Liberation day (5 th of May), every 5 th year. Good Friday and Liberation Day are not days that are usually paid free days. This is at the discretion of the employer Working hours Two laws, the Working Hours Act (ATW) and the Working Hours Decree (ATB), are important regarding working hours. The main points of these laws are: The ATW contains a standard regulation for sectors and businesses that do not have regulations on working hours. It includes a maximum working day of nine hours and a maximum working week of 45 hours; the maximum number of hours that can be worked in a 13-week period is 520. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 24 of 28

25 Overtime may occasionally be worked to a total maximum of 11 hours per shift, 54 hours per week and 520 hours per 13 weeks. In every 24-hour period, employees must have a daily rest of at least 11 hours. If it is necessary to work on Sundays, agreement is needed between the employer and a staff representative. Employees must have at least four free Sundays in every 13-week period. In addition, the ATW includes a consultation regulation that imposes limits within which employers can set working hours after consultation with the employees. One of the provisions is that the maximum working day is ten hours, the maximum number of working hours per four weeks is 200 and per 13 weeks 585. Employees may occasionally work overtime to a maximum of 12 hours per shift, 60 hours per week and 624 hours per 13 weeks. The minimum number of free Sundays is 13 per annum. The ATB supplements the ATW in that it contains a number of special conditions regarding the applicability of the ATW to, amongst others, managers, employees earning more than three times the minimum wage and live-in domestic staff. Supplementary conditions on working and rest hours are also included. Special amendments and supplements have also been formulated for a number of sectors (e.g. cleaning, hotel and catering, and agriculture). In general, the customary working hours in the Netherlands are still 40 hours per week, although many businesses work only 38 or even 36 hours. For the employees, this reduction in working hours is often taken in the form of extra paid leave days (in case they are still working 40 hours), which days may be designated by the employer Payment of salary during illness Under section 629, Book 7 of the Netherlands Civil Code, an employee is entitled to payment of 70% of his salary for a period of 104 weeks (in so far as the gross salary does not exceed the maximum daily wage of per day (as of 1 January 2018) pursuant to section 17 of the Social Security Finance Act (Wfsv)), and for the first 52 weeks at least the applicable minimum salary, if the agreed work cannot be performed on account of illness. For periods of pregnancy or after childbirth, the salary is paid for 100%, however up to the maximum described above. Employees over the age for Old Age Pensions Act (AOW) have the right to sick leave pay during 13 weeks. Household staffs who work fewer than four days per week for the employer are entitled to receive payment for a period of six weeks. The obligation to continue paying salary (other than to household personnel as noted above) is applicable only if there is a civil-law employment, not if there is a notional employment (labour relations that do not constitute a contract of employment under civil law, but only do for payroll tax and social security purposes). It is not permitted to depart from this obligation to continue paying salary as laid down in the Netherlands Civil Code to the disadvantage of the employee, other than that the first two days of sickness may be for the account of the employee. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 25 of 28

26 It therefore cannot be agreed to pay the employee less than 70%, but more than 70% is permitted. The statutory obligation to continue paying salary is applicable only in so far as the maximum daily wage under the Wfsv is not exceeded. Employees who earn more than per day (as of 1 January 2018) are therefore entitled under the Netherlands Civil Code to 70% of per day only. It is however quite usual in the Netherlands that the employer pays during the first 52 weeks of illness 100% of the gross salary and during the second 52 weeks 70% of the actual gross salary. Successive periods of sickness with a maximum period of four-weeks in between are treated as a single period. Employees are not entitled to the continued payment of their salary if they refuse suitable alternative work offered by the employer that they can perform despite their occupational disability (provided the WCOS-doctor agrees). Such suitable work may also be for a different employer, for the employees protection subject to the prior approval of the Executive Organisation Employee Insurance (UWV). The salary paid is reduced by any occupational disability benefits the employee may receive from the Employee Insurance Administration Institute (only in exceptional cases). Many CAO s and individual contracts of employment state that the employer must continue to pay salary in full or in a bigger part then obliged by law for a period of 52 weeks, sometimes for as long as two years. To prevent the continued payment of salary during pregnancy and maternity leave from reducing the labour market opportunities of female employees, the cost of salary payments during pregnancy and maternity leave and during related sickness will be met from the safety net facility of the Sickness Benefits Act. In the case of pregnancy, the payment is 100% of salary during a period of six weeks before and ten weeks after childbirth. A limited number of weeks may be shifted from before to after the childbirth. The Employee Insurance Administration Institute reimburses employers (subject to a maximum) for all salary paid during maternity leave. The employer has the opportunity to re-insure his financial risk of sick pay. Insurance companies offer insurances in different compositions, as result of which the employer receives compensation from the insurance company in case of illness of an employee. There is however always an own risk period of at least 10 working days. The period can be longer and has then a decreasing effect on the premium for the insurance. Often also an extra percentage can be included for the employer costs for social security premiums Payment upon death of the employee If an employee dies, regardless of whether that happens during working hours or not, his employer is legally required to pay a death benefit, being the salary for a period of one month. A death benefit paid by the Employee Insurance Administration Institute, in certain circumstances pursuant to employee insurance schemes, is deducted from the amount payable by the employer. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 26 of 28

27 The death benefit may be paid entirely free of tax and social security contributions. Tax regulations enable employers to pay tax free up to three times the gross salary over a period of a month due to the death of the employee, his partner or his children Non-competition clause If the employer wishes to agree a competition restraint clause with the employee, he must do so in writing. A restraint clause forbids the employee (usually subject to a penalty) from performing competitive work in a certain profession and / or region during a given period after termination of the contract of employment. In most cases, a restraint clause is only included in a contract of employment if the work in question is sensitive to competition, for example in the case of a representative. Case law shows that the provisions of a restraint clause may not be so restrictive that they prevent an employee from earning a living. If legal proceedings are instituted, the court may limit the consequences of a restraint clause, or even order the employer to pay the employee damages. It is prohibited to include a non-competition clause in a fixed-term contract. This also is applicable for a client relation clause. Nevertheless there is a possibility to include a non-competition clause and a client relation clause, in case of compelling reasons, which have to be described in the employment contract extensively. Such clauses are meticulously assessed by the court and often not accepted. 8 Payroll accounting services and advice on conditions of employment ESJ Financial Engineering has an International payroll department which has a great deal of experience in keeping payroll accounts for international clients. Next to the International Payroll department we have a separate department for local payrolls. Since specialised knowledge is needed to keep payroll accounts correctly, it is impractical for many employers to take on a member of staff specifically for that purpose. In such cases, ESJ can keep payroll accounts for the employer, providing virtually every service that he may require. We can also assist employers by advising them on national and international payroll tax, income tax, corporation tax, social security issues, labour law and labour conditions (including employment contracts and dismissals) in the Netherlands. The specialists of ESJ Financial Engineering would be pleased to assist you. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 27 of 28

28 For more information about the contents of this memorandum or for advice please contact: René de Groot Senior Consultant for Payroll Tax, Social Security and Labour Law Arno de Kok Consultant for Payroll Tax, Social Social Security and Labour Law Phone: +31 (0) ; Phone: +31 (0) ; hwww.esjinternational.com Colophon Although the greatest care has been taken in compiling this memorandum, there is always the risk that certain information may become out of date or no longer correct. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material included in this publication can be accepted by the authors. Memorandum Payroll Tax, Social Security and Labour Law ESJ Financial Engineering Page 28 of 28