An employer may, under certain circumstances, be required to notify an employee of a change in regulations that is relevant to the employee's tax position. This was ruled by the Supreme Court on 22 September 2023. This duty to warn or inform follows from the principle of good employment practice.
Pursuant to Section 7:655 of the Dutch Civil Code (DCC), the employer has a duty of information towards the employee. This information obligation has been extended with the entry into force of the Transparent and Predictable Working Conditions Act on 1 August 2022. Pursuant to this Section, the employer must inform the employee, among other things, about the entitlement to holidays or other paid leave (such as care leave, parental leave, etc.) and the procedure in case of termination of the employment contract. If the employer fails to fulfil its duty to inform, the employer is liable to the employee for any damage caused as a result. In addition, some other statutory information and warning duties apply to the employer, see for example Section 7:665a DCC (information duty in case of a transfer of undertaking) and Section 7:658 DCC (warning duty to prevent accidents at work).
In a decision dated 22 September 2023, the Supreme Court ruled that an employer's duty to warn or inform can also be assumed under Section 7:611 DCC. Section 7:611 DCC contains the principle of good employment practices. This principle is a vague standard; the law does not state what this principle exactly entails. According to the Supreme Court, this principle may require an employer to warn or inform an employee in case of a change in regulations that are relevant to the employee's tax position. This news item discusses this decision and its relevance for practice.
Facts
The case involved two commercial pilots who had joined KLM in 1990 and 1991 respectively. As the pilots were residents of and tax-liable in Switzerland, the Dutch tax authorities issued a declaration of exemption in 1991 for both of them to avoid double taxation.
With effect from 1 January 2012, the tax treaty between the Netherlands and Switzerland changed. KLM did not withhold income tax from the pilots' salaries in the years 2012-2017. As a result, in 2017 and 2018, the Dutch tax authorities imposed substantial additional income tax assessments on the pilots for the years from 2012 onwards.
The pilots claim in court payment of the amounts they must pay to the Dutch tax authorities or damages from KLM, arguing that KLM acted in violation of the principle of good employment practices. According to the pilots, KLM should have warned them in time of the consequences of the treaty change and should also have deducted wage tax from their wages.
Subdistrict court and court of appeal
The subdistrict court ruled that KLM was liable for the damages suffered by the pilots, because KLM had a duty of care towards the pilots. The subdistrict court limited this liability to 50%, as the pilots, as taxpayers, were ultimately responsible for timely payment of income tax.
However, the court of appeal ruled that KLM could not be expected to keep up with the tax situation and tax law changes and inform its employees thereof in a timely manner. Therefore, the court of appeal rejected the claims of the pilots. The pilots appealed against this judgment of the court of appeal.
Supreme Court
The Supreme Court states first and foremost that an employee is responsible for correct compliance with their tax obligations. In principle, the employer has no advisory role in this respect. However, under certain circumstances an employer may be obliged to inform the employee of a change in regulations that are relevant for their tax position. This follows from the principle of good employment practices. According to the Supreme Court, this may be particularly the case if the information is also relevant to the employer's obligation to withhold and remit wage tax. After all, an employer should be aware of such information by virtue of that obligation. Another relevant factor is whether and to what extent an employee may suffer adverse consequences from being unaware of the said information.
Finally, the Supreme Court concludes that the finding of the court of appeal that no duty to warn or inform applies to KLM is incomprehensible or unreasoned in light of the following specific circumstances:
- KLM is a large professional employer with its own tax department and many employees living abroad;
- it involved a treaty change that would potentially result in some of its employees becoming liable to income tax in the Netherlands, unlike before, and KLM would have to withhold and remit income tax on the wages of these employees; and
- KLM was and should have been aware of the treaty change (in connection with its responsibility for withholding income tax).
The Supreme Court sets the judgment of the court of appeal aside and refers the matter to the court of appeal of The Hague.
Relevance for practice
Some lower courts have previously ruled that the employer has a duty to provide information pursuant to the principle of good employment practices in combination with the statutory information duties. The Supreme Court, in its judgment of 22 September 2023, has now expressly adopted a duty of warning or information on the part of the employer under the principle of good employment practices. On the basis of this decision, an employer may therefore be obliged, by virtue of good employment practices and under certain circumstances, to warn/inform an employee in a timely manner in the event of a change in regulations relevant to the employee's tax position. This duty to warn or inform does not alter the fact that the payment of income tax is the employee's responsibility and that the employer does not have an advisory role therein.
The question is which circumstances the Supreme Court is referring to. This is not explained in this decision. However, the Supreme Court does indicate that this obligation can be assumed in particular if the information in question is equally important for the employer's own tax obligations. Whether a warning or information obligation should be assumed in a specific case also depends on whether and to what extent an employee may suffer adverse consequences from being unaware of that information. In addition, it seems to follow from the Supreme Court's decision that a warning or information obligation will be assumed more quickly if the employer in question is a (large, professional) employer with its own tax department and many employees abroad, the employer is aware (or should be aware) of the relevant information and this information leads to changes in income and payroll tax.
In addition, it can be derived from the Supreme Court's decision that - based on the principle of good employment practices - employees should also be warned/informed in a timely manner in cases other than a tax treaty change. The duty to warn or inform adopted by the Supreme Court in this case is formulated more broadly: such a duty can be assumed in the case of a change in regulations that are relevant to an employee's tax position. This means that under circumstances, employers must also give timely warning/information to employees in cases other than a tax treaty change. Consider, for example, the capping of the 30% facility to the so-called WNT standard (pursuant to the Senior Executives in the Public and Semi-Public Sector (Standards for Remuneration) Act) that comes into effect on 1 January 2024 (note: this is subject to a transitional arrangement until 1 January 2026 for employees to whom the 30% facility was applied over the last pay period of 2022). For the sake of completeness, it is noted that the above applies in addition to the employer's statutory information and warning obligations discussed earlier.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
