Understanding Payroll in the Netherlands: What Global Companies Need to Know About Dutch Payroll
Although a relatively small nation of just over 17 million people, the Netherlands has a prime role at the beating heart of European business. A founding member of the European Union, it enjoys strong links with all major economies, a status as a major transport and shipping hub, and benefits from a highly-educated population that has the best English language proficiency of any non-native English-speaking country in the world.
Growth in the Netherlands has remained steady since the financial crisis of 2008 and 2009, and although it is taking a hit as a result of COVID-19, its attractiveness as a place for international firms to do business remains undiminished. The Netherlands also has an open-minded and welcoming attitude to incoming foreign investment.
However, labor laws in the Netherlands are complex, with a strong focus on employees being compensated in an accurate and timely manner, with stiff penalties for transgressions. To steer past these challenges, there are a number of key aspects to running payroll in the Netherlands worth considering:
Starting up a business in the Netherlands is relatively straightforward, and doesn’t require a visa or work permit for citizens of the European Union or the European Economic Area. Those outside of this can apply for a 12-month visa specifically designed for starting up businesses in the Netherlands.
Businesses in the Netherlands fall into two categories: unincorporated and incorporated. The former largely covers sole traders and partnerships, while the latter encompasses private limited companies (‘besloten vennootschap’ or ‘BV’) and public limited companies (‘naamloze vennootschap’ or ‘NV’). BVs do not come with any minimum requirement for start-up capital, while NVs must be started with at least €45,000 (approximately £40,700; $52,500).
New businesses must register with the Dutch tax authorities (the Belastingdienst) and the Chamber of Commerce (the KVK, with a registration fee of around €50). Citizens starting the business must also register with the Netherlands’ immigration service (the IND).
Although many organizations prefer local bank accounts to be used for making payments to relevant authorities, this is not a legal requirement.
The Netherlands’ financial year runs from January 1 to December 31.
As is the case in most developed economies, the Netherlands’ employment laws are designed to protect the rights of Dutch workers. One of the most important aspects is for employers to recognize that collective labor agreements take precedence over statute law if they are more favorable to the employee. Additionally, minimum conditions established by the collective agreement can only be improved upon in an individual contract of employment, and never worsened.
Employees recruited from abroad who are classed as highly-skilled migrants qualify for a tax advantage known as the ‘30% reimbursement’ ruling. In this case, 30% of gross earnings made by an employee in the Netherlands is exempt from income tax, and only the remaining 70% is taxable. This tax break must be applied for from the tax authorities, jointly by employer and employee, and can be received for a maximum of five years. There is no impact on tax contributions from the employer’s perspective as a result of employees receiving this.
Employers must ensure new employees sign a salary tax declaration including their name, address, social security number, date of birth and whether the employee wants to use the tax discount. Employers should also request a copy of the employee’s passport and keep it on file for five years after employment has ended, in accordance with Dutch guidelines.
A standard five-day working week in the Netherlands is 38 hours, but can vary between 36 and 40 hours. Employees normally receive 30-minute unpaid lunch breaks each day. Legal working limits of 12 hours per shift and 60 hours per week apply, although the weekly limit is reduced to 55 hours per week averaged over a four-week period, and 48 hours per week averaged over a 16-week period. There is no specific legislation regarding overtime; rates are to be determined in individual contracts of employment, although it should be noted that overtime is relatively uncommon in the Netherlands.
Compensation, Severance & Retirement
The national minimum wage in the Netherlands is €1680 per month (approx. £1500, $1950) for workers aged 21 or over; lower rates apply for younger employees. The minimum wage rates are reviewed and adjusted by the Dutch government twice a year, with changes introduced on January 1 and July 1.
Payroll periods typically include one payment per month, and it is the employer’s responsibility to enter the payment data and sign each form before sending to the bank. To pay employees, a company may choose to set up a local bank account that is compatible with Equens, the payment service provider used throughout the Netherlands.
In cases of termination, approval must always be obtained from the regional employment offices. Although termination by mutual agreement does not require authorization, some form of documentation is useful to prove compliance with the stipulations of the collective agreement, such as periods of notice and payment of outstanding wages.
Severance pay in the Netherlands is known as ‘transition compensation’ (transitievergoeding). It is calculated using a formula that multiplies the ‘S-factor’ for length of service by the ‘R-factor’ of remuneration:
S-factor: one-sixth for every half-year of service for the first ten years of employment, plus one-quarter for every half-year of service thereafter
R-factor: monthly remuneration, taking into account basic pay, overtime, bonuses, profit sharing and a holiday allowance of 8%
Therefore, an employee earning €4000 per month who is being dismissed after five years would have an S-factor of 1 ⅔, and an R-factor of €4320, making their total transition compensation €7200.
Tax and Social Security Considerations
Employers are responsible for deducting taxes through payroll on a pay-as-you-earn (PAYE) basis, with the amount determined by the total gross income minus personal allowances. The employer must pay tax contributions to the local tax office on a monthly basis, with payments due by the end of the month following payroll. Another important factor to keep in mind is that if an employee and their spouse are both resident taxpayers, they are taxed separately on their employment income.
Income tax in the Netherlands is currently applied progressively across three bands, which as of 2020, are as follows:
- 9.7% on earnings up to €34,712 (approx. £31,300, $40,500)
- 37.35% on subsequent earnings up to €68,507 (approx. £61,700; $80,000)
- 49.5% on all further earnings
For all income in the first band, a social security deduction rate of 27.65% is also applied, and this must also be deducted by the employer. This applies to everyone who works in the Netherlands, and treaties are in place with some other countries to ensure that foreign workers aren’t required to pay social security contributions in two different countries simultaneously.
Holiday and Leave Considerations
Full-time and part-time employees in the Netherlands are entitled to a minimum of four weeks’ paid holiday each year, calculated by the number of hours they work. This means an entitlement of 20 days for full-time employees. On top of this, employees are also entitled to a holiday bonus of 8% of their annual earnings. Sick leave is paid at a minimum of 70% of earnings for a maximum of two years, although some employers choose to keep ill employees on full salary.
Maternity leave in the Netherlands runs for 16 weeks, while paternity leave runs for one week; both of these are paid at full salary, based on social security contribution amounts from the previous 12 months. The maximum among payable is €203.85 per day (approx. £185; $240). A right to five weeks’ unpaid parental leave, available to either parent within six months of birth, was introduced in July 2020.
The Netherlands has ten days of official public holidays per year, although pay for these is regulated by labor and collective bargaining agreements rather than by legal entitlement.
The Netherlands has its own unique set of rules regarding payroll and employment, but navigating a course through them can be extremely rewarding, thanks for the rich opportunities on offer for businesses operating there. Companies looking for more in-depth help should consider partnering with an expert payroll provider, who can help support payroll implementation and guide strategy for businesses in the Netherlands, Europe and beyond.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.