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Saturday, 12 April 2014

Cabinet Rutte does something about the “not so free” lancers. What initially sounds like the punishment of a whole group already under jeopardy, might be a blessing in disguise after all.

Over the years, I have done my share of writing about the freelancers on the Dutch labour market.

In the past, labour contracts in The Netherlands were often ‘contracts for life, carved out in marble’. This was a good thing in times of economic prosperity as it bonded employers and employees together and spurred loyalty. However, excess workers with their ironclad contracts could turn into an almost lethal millstone for companies, when things became rough financially. 

That is why freelancers, as a flexible shell of temporary labour, definitely added some desperately needed dynamics and pizazz to the traditionally very static Dutch labour market. Especially in tough economic times, the freelancers were the frontrunners of the labour market; they acted as a quick response squad at times when extra hands were already needed, but companies were still reluctant to offer people fixed labour contracts.

In these cases, the freelancers were a true blessing for all parties: companies had their badly needed flexible labour force to add to their contracted workers and the freelancers earned a more than decent remuneration for their hard labour.

During the last ten years, however, freelancers – or ZZP’ers as they are called in Dutch (i.e. independent workers without personnel) – lost much of their ‘sex appeal’.

From a desperately needed and well-rewarded flexible labour force, freelancing turned more and more into a ‘nice ‘n  sleazy’ way for companies to ditch personnel with fixed contracts. 

This happened especially in the building industry, transport & distribution, healthcare, education, facilitary services and (to a lesser degree) the ICT industry. Many 'expensive' or excess workers with favourable fixed contracts were ‘fired and hired back at gunpoint’ as freelancers, with a contract for one assignment or for a restricted period alone. Everybody happy, right?! Wrong!

Here is a snippet from a two months old article:

In many service industries, companies did only the unavoidable projects and changes. Further they ‘kept open the shop’ and hoped that they would survive the crisis.

As a consequence, there has been a substantially dropping demand for both manual labourers and highly skilled knowledge workers; especially in industries, like building & construction, transport and distribution, telecommunication, ICT services, commercial services, financial services and facilitary services.

At the same time, there has been a large influx of workers from the European and global low wage countries (f.i. Poland, Spain, Portugal, the Baltic states, Romania, Bulgaria, Ukraine and India).  These were people, who were willing to work very hard for a fraction of the price that a Dutch worker or freelancer charged.

Especially when the working skills of the foreign worker were as good as those of his more expensive Dutch competitor, the foreign worker often got the job. This was not only true for low qualified, hands on-jobs, but also for the highly qualified knowledge jobs.

These two factors have put enormous pressure on the remuneration fees for especially the many freelancers in The Netherlands.

Both their awkward negotiating position against large principals and the strongly diminished number of available assignments, as well as their need for a constant flow of work and income, makes that freelancers have been quickly giving in on their remuneration demands.

The pressure on the tariffs of freelancers has indeed been enormous, during the last few years. Many freelancers are now working for remuneration fees, for which they would not have opened their eyes just ten years ago. These ‘not so free’ lancers are tied with hands and feet to their temporary principals – often their ex-employers – afraid as they are to lose their jobs and thus their only source of income. They earn just enough money to live from in the present, but they can’t save a penny for a rainy day.

The only thing to keep these freelancers alive is the national ‘independents allowance’: a subsidy, which is administered through the Dutch income tax system. This way, the independent freelancers have to make much less tax and social security payments than employed workers with a fixed contract.

The result of this independent's allowance has been that normal workers have been clearly discriminated, in comparison with freelancers, who were actually not free at all: normal workers had to pay more taxes, more pension money and much more social security money than these freelancers. You could call this unfair competition and many (large) companies have used and perhaps abused this situation.

This was the reason for Cabinet Rutte II to do something about this. De Volkskrant:

The Internal Revenue Service wants to make an end to pseudo freelancing. Freelancers in healthcare and education will not receive tax benefits anymore, as they work in fact under a situation of ‘conceiled employment’. Also the ICT industry, transport & distribution and the building industry will get under more heavy scrutiny by the IRS.

The cabinet wants to deal with the over-the-top flexibilization at the Dutch labour market, partially because it loses hundreds of millions in missed tax payments. 

Tens of thousands of freelancers will lose their permit to work as an independent. Instead they must enter into a contract with their principal, which should pay social security premiums and taxes; just like a genuine employer. Especially in healthcare only a small minority of the current freelancers can remain independent.

A deal has been made in the Second Chamber of Parliament, that freelancers in healthcare are not allowed anymore to work through mediation agencies. 

Many of these agencies work as an actual employer: they not only bring supply and demand together, but they also create working schedules and arrange payments for their freelancers. 

In order to dismantle this working method, already 20% of freelancers in healthcare has been refused an 'independent’s  permit' by the internal revenue service. Without this so-called VAR-declaration, a freelancer cannot work as an entrepreneur. According to disappointed freelancer’s organizations, the contracts ‘are not exactly flooding the streets, while freelancers already go through a rough time’.

Robin Fransman is a former executive of the Holland Financial Centre (an internationally oriented lobby club for the Dutch financial industry), regular economic blogger and one of the savviest economists on Twitter. Fransman wrote a blazing discourse against these freelancers or ‘Zelfstandigen Zonder Poen’ (ZZP), as he sarcastically called them (i.e. ‘independents without cash’; untranslatable lingual joke).

Here are a few snips of this must-read article by Robin Fransman:

Finally the cabinet does something about the destructive force of pseudo freelancers. In some industries, freelancers will be forbidden and the VAR-declaration (i.e. independent’s permit) will not be handed out so easily anymore. And if you have one after all, you will be checked. If you don’t meet the obligations of this declaration, your principal – aka your employer – can expect an after-tax.

Freelancers undermine the Dutch labour institutions. They undermine the Dutch pension system, the labour unions, the collective labour agreements and the position of employees with fixed contracts. 

They earlier make usage of national social security and welfare safety nets, as they don’t become part of the regular employee’s social security systems. And last, but not least, they suppress the wages. In other words: these freelancers are the 21st century equivalent of the ‘piece-rates’ workers from the 19th century.  

To make things worse, the national government subsidized these freelancers with additional tax benefits. These freelancers pay €5,000 - €12,000 less in taxes than a normal employee. And they actually don’t receive this money themselves, as they use it to reduce their tariffs, enabling the principal, excuse me… employer, to cash this money. 

Indeed, the freelancers are not insured against sickness, labour disabilities or unemployment and they don’t pay pension fees. However, in the case of normal workers, the premiums for these wage components are paid out of the disposable loan components. As a freelancer, you should as a consequence also incorporate these premiums in your tariff range. So please get the heck out with this subsidy for fake-entrepreneurs.

It are indeed the employers which reap the financial harvest of the superflex labour. And do you know who suffer most from the freelancers? The freelancers themselves! The total income of all freelancers combined dropped by 27%, since 2008.  And there is more: as the number of freelancers increased, the income per freelancer actually dropped by 33%, to a level of 1998. This drop can almost be fully accounted to the declined tariffs.

Although Robin Fransman has been slightly over the top in this article at some occasions, the tendency of it is spot on.  

This development, in which employers squeeze their freelancers and temporary contractors out for the last penny, has been going on since the crisis started in 2008. Unfortunately, it did not finish yet. It is a dangerous development, as it leads to a race-to-the-bottom with respect to tariffs and regular income. This is bad for employees, as well as employers eventually:

Many ZZP-workers (especially in B&C, Transport and the ICT-industry) hear the heavy breathing from tens of thousands of workers from the East-European and Oriental low-wage countries, like Poland, Romania, Bulgaria and India. People that will do the same job for a fraction of the hourly rate that Dutch workers require.

When it is not possible for employers to pay these lower wages in a legal fashion, due to collective labour agreements (CAO’s) and minimum wage-constraints in their industry, some companies do this even illegally, by evading the CAO-agreements and minimum wage through opaque business-constructions.

The result is that domestic and foreign workers from the low-wage countries are both entangled in a race-to-the-bottom for tariffs and income. This race leaves especially the domestic workers in an awkward financial position, with an income that is too little to structurally live from with a family in The Netherlands. Companies, which often suffer from an awkward financial situation themselves, can not help, but doing this in order to survive.

When these freelance workers run out of a job eventually, they neither have a right to unemployment benefits, nor are their reserves sufficient to live from for a number of months. Poverty looms in such a situation.

Therefore I consider it a good thing that, from now on, the VAR-declarations will only be handed out to real freelancers and not to the pseudo freelancers, who have been mentioned in this article.

Initially, it is of course a bad development for many cash-strapped freelancers. I symphatize with them very much, as they often did not have a real choice in the past.

However, this development might help companies to realize that their freelancers need a decent income too, from which their families can live and they can save a penny for a rainy day. The current times, in which suppliers and freelancers are put under enormous financial pressure by so-called procurement departments at their principals, should be over as soon as possible. 

This would make this change by Cabinet Rutte II a blessing in disguise…

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