Clarification ‘wages’ in renowned Smeerkuil-ruling
12/04/22
In a judgment of 25 March 2022, the Supreme Court addressed the interpretation of the ‘Smeerkuil’ ruling from 1983. What if you as employer are held liable for personal injuries suffered by your employee while performing their employment activities? The compensation paid to your employee for personal injury in principle does not qualify as wages, unless you as employer would compensate more than necessary based on your liability.
Ruling Supreme Court
In the well-known ‘Smeerkuil’ ruling from 1983, the Supreme Court came to the conclusion that compensation paid by the employer to the employee relating to an accident does not necessarily qualify as part of the employee’s wages. If this compensation relates to incurred immaterial damage and loss of potential labor (‘arbeidskracht’) due to an accident, it cannot be said that this compensation is paid in the context of the employment relationship and therefore should be considered as remuneration. However, such compensation payments can still be considered as wages if special circumstances come into play, such as certain agreements made in the employment contract or other legal regulations.
In this ruling the Supreme Court clarified when a certain agreement in legal regulations regarding personal injury compensation does in fact constitute wages. This is the case if the employer compensates more than would be necessary based on the employer’s civil law obligations. In short, the question is whether the employer intended to "reward" the employee by providing more compensation than was strictly necessary. Whether or not such an agreement is included in any (legal) regulations is then not relevant.
Background
This case concerned a volunteer firefighter who was employed by one of the Dutch Safety Regions. While performing his (firefighting) duties, he was involved in an accident that left him with permanent injuries and permanent limitations of movement. The employer had taken out insurance for this situation, as was agreed in the collective terms of employment. At the time of payment of the personal injury compensation, the employer subsequently withheld payroll taxes.
In the first instance the Court ruled that the compensation paid out to the employee did not qualify as wages. After all, it was never the intention to 'reward' the volunteer firefighter. It was in fact part of the public task assigned to the Safety Region that insurance was taken out in line with the collective terms of employment.
The Court of Appeal, however, ruled differently. Based on the ‘Smeerkuil’ ruling, the Court of Appeal considered the compensation to be paid based on the collective terms of employment (which is a legal regulation). As a result, the compensation would qualify as wages.
Supreme Court clarifies the ‘Smeerkuil’ ruling
In this new judgment the Supreme Court very clearly states that it is not relevant whether or not personal injury compensations are incorporated in the terms of employment. What is relevant is whether or not the offered compensation is higher than what the employer would be obligated to pay based on (civil) liability. With this clarification, the Supreme Court refers the case back to the Court of Appeal. The Court of Appeal will have to investigate whether the compensation constitutes a larger payment than what was legally necessary.
In short, the main rule as laid down in the ‘Smeerkuil’ ruling remains as it was. Compensation for incurred immaterial damage and loss of labor power does not, in principle, constitute wages unless there are special circumstances. A special circumstance can be an agreement in a legal regulation, but in that case the compensation should be higher than what the employer would be obligated to pay based on civil law.
What does this mean for you?
If you are liable as an employer for personal injury suffered by employees while performing work activities, please be aware that you should only withhold payroll taxes over (additional) compensation that does not follow from your civil liability.
This judgment provides insight into the way the Supreme Court defines wages. Although in principle wages constitute all that is received from a (former) employment relationship, there are also situations in which compensation from the employer to the employee does not form part of the employee’s wages. Compensating your employee based on your civil liability is an example of such a situation. If you have similar regulations, your PwC advisor is more than happy to discuss your situation with you.
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