Judgment on the qualification of a “payroll company” and a “temporary agency contract”

On 4 November 2016, the Supreme Court in the Netherlands issued an important judgment that will impact on the use of payroll companies. In this judgment, the Supreme Court held that no “allocation function” is needed to qualify as a temporary employment agency contract (uitzendovereenkomst). This e-Alert provides a summary of the judgment and further background on its impact and scope.

In this case, the main legal issue was the interpretation and scope of a temporary agency contract. StiPP operates an industry wide pension fund that is mandatory for temporary agency workers. StiPP argued that the business activities of Care 4 Care (C4C) fall within the scope of StiPP and that C4C therefore should have joined the mandatory pension fund. C4C provides qualified medical specialist staff to clients, i.e. hospitals, care institutions and home care. Employees of C4C work on a permanent employment contract with C4C and are seconded to clients for long periods, from three months to a year, or longer if required.

C4C claimed that to qualify as a temporary employment contract the employer must fulfil an ‘allocation function’. Such a function could be bringing together supply and demand for (temporary) employment, or - more specifically - bringing together supply and demand of (temporary) work during illness or other absence, absorbing peak time work requirements or similar sudden work needs. As this allocation function was not present, C4C argued that instead it should qualify as a payroll company which would prevent it from mandatory participation in StiPP. When a business decides to operate payrolling, it hands over the legal and administrative aspects of its role as an employer to a payroll company. The client recruits and selects the employees, and the payroll company makes them available to the client exclusively and – in principle – for the longer term.

The Supreme Court did not agree with C4C, because the concept of “payrolling” is currently not recognised under Dutch law. Article 7:690 of the Dutch Civil Code defines a temporary employment agency contract as an employment agreement under which the employer, within the framework of his business or professional practice, places the employee at the disposal of a third party in order to perform work under supervision and direction of that third party. According to the Supreme Court, the scope of this Article does not require the employer to fulfil an allocation function or require the work performed for the third party to be temporary. The application of the rules suggested by C4C would lead to results that cannot be reconciled with what the legislator had in mind. Consequently, C4C could therefore be regarded as a temporary worker agency and is therefore required to participate in StiPP.

As a result of this judgment, the legal scope of a temporary employment agency contract has been broadened, because the allocation function is not required. As a consequence, payroll companies and other companies that supply workers on a large scale, will have more financial obligations (e.g. pension premiums and employee insurance schemes). Operating a payroll company will therefore become more expensive. However, using a payroll company remains less expensive than hiring through a temporary worker agency. Another important consequence of the judgment is that the temporary employment agency has the flexibility to offer more definite term contracts. If you make use of a payroll agency, we suggest you review and monitor the terms of the relationship.

For any advice in this respect or further questions in respect of the above, please feel free to contact Thomas Timmermans