Rockstart Law School: Management agreements
Setting up and running a startup requires knowledge of the industry that you are in. It also requires knowledge about finance, marketing, customer service, management, and legal matters. There is no way of knowing everything you need to know, which is why the network that supports you becomes a valuable tool and asset.
Rockstart Law School is a combination of blog posts by outside contributors and vlog posts by Rockstart’s very own legal counsels Els Metten and Lisette Schuilwerve. They will show the roadmap to the legal side of starting and running a startup company. Rockstart Law School focuses on the Dutch law system as an example and is meant as a resource and gives you lessons learned and suggestions, but is not meant to be used in the place of legal advice. The mechanics of these topics tend to be similar from country to country, but the details could be different. Always consult a lawyer in the country where you are operating. We hope these series of posts will give you a greater understanding of the legal needs and points of attention that you may encounter during your startup journey.
In one of our previous blog posts for Rockstart Law School, we have guided you through the main rules and recommendations on employment agreements under Dutch law. We also briefly touched upon the differences between a management agreement and an employment agreement. In this blog post, we will further discuss these differences together with some tips and tricks should you decide to go with a management agreement.
Pros and cons
In which cases it is beneficial to enter into a management agreement depends on the motives of the parties. A management agreement is regularly used for persons who perform services for more than one company (so-called self-employed service providers), in most cases through a personal holding company. The service provider is in such case employed by its personal holding company.
Say you find the perfect CTO for your startup, Mr. Pete Peterson, and wish to make him an offer. A management agreement between the company and Pete’s personal holding company, Peterson B.V., could be interesting for Pete as it can lower his effective tax burden. For your company it could be beneficial as well, now that typical employment obligations (such as dismissal rules and salary payments during illness and during holidays) do not apply and the company is in principle not obliged to withhold income tax and employee insurance premiums.
As always, there are also downsides to the management agreement. The WBSO (i.e. the compensation for your company’s wage costs of employees carrying out research & development), for example, does not apply in case of a management agreement and – if not properly drafted or complied with – the agreement could entail a risk for your company of being held liable (with retroactive effect) for income tax and employee insurance premiums due to qualification of the contract as a notional employment relationship (fictieve dienstbetrekking).
What should the agreement include?
Just like the employment agreement, there are no rules as to the contract form (although we highly recommend entering into a written agreement to prevent discussions on the content).
It is recommended that the management agreement is entered into by the personal holding company of the person providing the services (i.e. by Peterson B.V. instead of Pete himself). An agreement solely entered into by the individual is more likely to be qualified as an employment agreement, which implies applicability of all statutory employment rules and the obligation to withhold income tax and social security premiums. Alternatively, both Pete and Peterson B.V. could enter into the agreement or Pete could co-sign the agreement to accept certain specific clauses (e.g. restrictive covenants).
Although the factual situation – and not the wording of the contract – is decisive to determine whether or not the contract should be qualified as an employment agreement, we do recommend to explicitly stipulate that no employment relationship exists, with reference to the relevant sections of Dutch law.
Do not forget to include a description of the services, the term, the fee (exclusive or inclusive of VAT) and the name of the actual service provider (i.e. Pete). To prevent qualification as an employment agreement, it is advisable to include that Peterson B.V. is free to perform activities for other companies and that, if Pete is unable to perform the services, Peterson B.V. may replace Pete by another person. If the services are not (properly) performed, the company is not obliged to pay the fee.
A termination clause should stipulate the applicable notice period the parties should take into account when terminating the contract. In addition, we advise to include a possibility for the company to terminate the agreement with immediate effect in certain circumstances, such as inadequate performance, dissolution of Peterson B.V. and non-performance of the services for more than a month.
To safeguard the company’s interest and protect its trade secrets, know-how and intellectual property, it is of great importance to enter into (written) restrictive covenants, such as a confidentiality clause, a non-competition clause, a relationship clause, a know-how and an IP clause, including a penalty clause upon breach of these restrictive covenants (for example a penalty of EUR 5,000 for each such breach and an amount of EUR 500 for each day on which the non-compliance continues). Please note that these restrictions should be drafted properly to avoid the risk that the contract will qualify as a(n) (notional) employment agreement.
Last but not least, always include a tax indemnity pursuant to which Peterson B.V. indemnifies the company against all claims and costs with respect to premiums and taxes payable due to qualification by the authorities as a notional employment relationship.
Not sure if your management agreement is completely bulletproof? We would be more than happy to take a look!
Merel and Valerie are attorneys at Rutgers & Posch, an independent boutique firm located at de Herengracht in Amsterdam and are part of its Expert Start-up Team. Should you have any questions regarding employment issues, contracts or corporate law issues (such as advice on your corporate structures, employee incentives or investments), please give them a call and they would be more than happy to assist you! http://www.rutgersposch.com/en/
T +31 20 891 3949
M +31 6 20 148 184
T +31(0)20 891 3925
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