Article Franchise+ – “Recipient’s liability in a franchise context, what exactly is that about?” – mr. K. Bastiaans – dated November 24, 2020

The phenomenon of hirer’s liability means that a third party can be held liable for the debts of another under certain conditions. The Court of Noord-Holland, location Haarlem, ruled in a ruling of 22 October 2020 (3) that a catering franchisee is not liable for the (external) cleaners hired by him.

The central question in this discussion was whether the plaintiff (franchisee of six restaurants) can be held liable by the Tax and Customs Administration for the non-payment of payroll taxes and turnover tax – hired by cleaning companies.

Based on the franchise agreements concluded between the franchisee and the franchisor, the franchisee is obliged to comply with a detailed hygiene plan. To meet these (hygiene) requirements, the franchisee has concluded cleaning agreements with two companies (for the sake of convenience, company A and company B). This was the case for both cleaning agreements (i) a fixed price per month per restaurant for the cleaning work has been agreed, (ii) the cleaning work was carried out after hours in the restaurants and (iii) the cleaning materials used for cleaning the restaurants have been made available by the franchisee.

When the Tax and Customs Administration found that the invoiced hours of the cleaning work did not match the paid hours during audits at both cleaning companies, the inspector imposed additional tax assessments on both companies, the calculation of which took place on the basis of a fictitious calculation used by the inspector. hourly rate of € 20.00.

Based on the hirer’s or chain liability, the franchisee has been held liable by the Tax and Customs Administration for the payroll tax and sales tax (€ 238,882) not paid by A and the payroll tax (€ 256,870) not paid by B. It is important to note that both company A and company B have been dissolved.

The franchisee takes the position that the legal conditions for hirer’s liability have not been met since there were cleaning agreements with both company A and company B, and it did not supervise the cleaners and was not in charge of them either. In the view of the franchisee, the cleaners therefore did not function as its own employees. The Tax and Customs Administration argues that there is indeed question of hiring in now that the restaurant manager had overall control with regard to the cleaning activities and the cleaning products were also made available by the franchisee.

If it appears that the lender of the labor force does not pay the wage tax and turnover tax, this may result in liability on the part of the hirer. In the present case, the burden of proof (that there was a question of hiring in) lay with the Tax and Customs Administration. In short, the court concludes that the Tax and Customs Administration has not proved this; the mere fact that the restaurant manager checked whether the work was carried out properly and supervised the quality does not mean that this should be classified under the condition of ‘working under his supervision or direction’, as referred to in Article 34. Nor has it been made plausible that the aforementioned check was any other than that on (the quality of) the result of the work, which is customary in a client/contractor relationship.

There is therefore no question of hirer’s liability under Article 34 of the 1990 Collection Act. The franchisee can therefore not be held liable for additional charges.

The Tax and Customs Administration invokes chain liability in the alternative for wage tax and national insurance contributions. The franchisee should be able to be regarded as a ‘self-builder’, as a result of which it should be equated with a contractor pursuant to Article 35 of the Collections Act 1990, which would result in liability.

The franchisee defends itself by stating that the cleaning activities should be regarded as specialized activities and not belonging to the main activity of the company. The cleaning work carried out would therefore not have been carried out in the normal course of business.

The question that had to be answered is whether the franchisee can be equated with a contractor, which is the case if this is part of normal business activities.

The court answered this question in the affirmative. Decisive here is the hygiene plan that the franchisee must comply with on the basis of the franchise agreement. If the franchisee does not comply with these obligations, this can have far-reaching consequences, as a result of which the cleaning activities, according to the court, are essential for business operations. The franchisee’s defense fails: the cleaning activities performed were so embedded in the franchisee’s organization that they must be regarded as activities belonging to the normal course of business within the meaning of Article 35, paragraph 3, opening lines and letter b, Collection Act 1990. The court is therefore of the opinion that the franchisee can be regarded as an owner-builder to that extent, and can in principle be held liable for the unpaid additional payroll tax assessments.

The franchisee takes the position that the calculation with regard to the payroll tax assessments has been calculated incorrectly. She argues that an hourly rate of € 20 has been wrongly applied. If the calculation were based on objective industry data, this would result in a reduction or elimination of the assessments. The Tax and Customs Administration states that it was entitled to charge an hourly rate of €20, now that this has been communicated by a partner/shareholder of the cleaning companies.

The payroll tax additional assessments have been determined with application of a reversal and aggravation of the burden of proof pursuant to Article 25, third paragraph, of the General State Taxes Act. As a result, the burden of proof that the additional assessment has been correctly calculated rests with the Tax and Customs Administration. The court is of the opinion that the Tax and Customs Administration has not met that burden of proof, now that it has not been sufficiently substantiated that the application of the aforementioned hourly rate is correct.

The court upholds the appeals; the statutory conditions for hirer’s liability have not been met. The Tax and Customs Administration has not been able to demonstrate that the cleaners were under the management/supervision of the franchisee. On the basis of chain liability, the franchisee can be held liable for unpaid additional payroll tax assessments, since the cleaning activities formed such a part of the organisation/formula that these activities should be regarded as ‘belonging to the normal course of business’. The court nullified the claim of liability after all because the Tax and Customs Administration had not made it plausible that the determined additional tax assessments were correct.

Conclusion

If, as a franchisee, you make use of contractors who use workers to carry out assignments, there is a risk that you can not only be held liable for unpaid wage tax and turnover tax on the basis of hirer’s liability, but there is also a risk that chain liability will result in liability for the unpaid payroll tax. Therefore, be well informed about the various options to limit the risks as much as possible.

mr. K. Bastiaans – franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice. Do you want to respond? Go to bastiaans@ludwigvandam.nl 

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