What is Severance Pay?
Employees in the Netherlands are legally entitled to severance pay, also known as transition pay or transition compensation, any time their employment relationship is terminated at the employer’s initiative, regardless of the length of the employment relationship. Employees can also collect transitional severance pay if the employment relationship is terminated by the employer during the probationary period or any time a fixed-term contract is not extended or renewed by the employer. Employees in the Netherlands enjoy robust protections under Dutch employment laws, but these laws can be complicated and confusing, and severance pay disputes are not uncommon. Our attorneys have extensive experience in areas related to employment contracts, dismissal law, reorganization, termination agreements and severance pay in the Netherlands, and we can help you recover the severance pay you are entitled to following involuntary dismissal from employment.
Employment Law in the Netherlands
Dutch employment laws have undergone significant changes over the past several years. Originally adopted in 2014, the Dutch Work and Security Act effectively overhauled employment and dismissal law in the Netherlands for the first time since 1945, substantially revising the laws governing flexible employment, dismissal and employment benefits. The primary focus of the Dutch Work and Security Act was to limit the gap between fixed-term and indefinite-term employment in the Netherlands and make the laws governing termination of employment simpler, more fair and less costly. However, the Dutch Work and Security Act was met with heavy criticism, and after only five years, Dutch employment law underwent additional changes with the introduction of the Labor Market in Balance Act (Wet arbeidsmarkt in balans, in Dutch, or WAB).
The Labor Market in Balance Act
In 2019, the Labor Market in Balance Act was approved as part of an effort to address the rapid growth of fixed-term (temporary) employment in the Netherlands and make indefinite-term (permanent) employment contracts more appealing to employers. As such, the WAB, effective January 1, 2020, made some important modifications to Dutch employment law, most notably with regard to employment contracts, dismissal and transition compensation. Under this law, Dutch employees are entitled to collect severance pay if they are involuntarily dismissed or their employment ends for either of the following reasons:
- The employment contract is terminated early for any reason other than the employee’s conduct or performance, or
- The employment contract expires and is not renewed by the employer.
What is an Employment Contract?
An employment contract (arbeidscontract in Dutch) is an agreement between an employer and employee that sets forth the conditions of employment and the rights and responsibilities of the employer and employee for the duration of the employment relationship. There are two main types of employment contracts in the Netherlands, a fixed-term (temporary) contract and an indefinite-term (permanent) contract. There are also on-call contracts, which apply to employees who do not have a fixed monthly salary and only work when their employer calls them up.
Under the Dutch Work and Security Act, employees in the Netherlands were only eligible for severance pay if they were involuntarily dismissed after being in service at their place of work for at least two years. This made fixed-term contracts far more appealing to employers, many of whom would offer employees 23-month contracts so they could avoid paying transition compensation when the contract ended. However, the Labor Market in Balance Act made it so that employees are entitled to severance pay from their first day of work, a provision designed to encourage employers to offer longer-term or indefinite-term employment contracts.
Severance Pay Requirements
In the Netherlands, transitional severance pay is a lump-sum payment meant to compensate employees whose employment contract has been terminated or is not renewed. Severance pay is paid by the employer to the employee who has been involuntary dismissed, to help the employee through the period of transition between jobs.
Under Dutch employment law, the amount of severance pay you are entitled to after being dismissed from your job is calculated based on one-third of your gross monthly salary for each year of service, regardless of your age or duration of service. This includes holiday allowance, bonuses and other fixed salary components. For any partial years you worked, the severance payment will be pro-rated accordingly. The maximum severance payment you can receive following a layoff or job loss in the Netherlands is capped at €83,000 or one year’s salary, whichever amount is higher.
Prior to the Labor Market in Balance Act, dismissed employees were entitled to one-sixth of their monthly salary for each six-month period they worked up to their first 10 years of service. After 10 years, they were entitled to one-quarter of their monthly salary for each six-month period they worked. There were also special allowances for employees 50 years of age or older who worked for a minimum of 10 years that are no longer applicable under the WAB.
Grounds for Dismissal in the Netherlands
Under Dutch employment law, employers are only permitted to dismiss their employees if they have good reason to do so. These are known as “grounds for dismissal” and in order for the court to terminate an employment relationship, at least one of the grounds must be fulfilled. The following are some examples of grounds for dismissal in the Netherlands:
- Redundancy due to economic circumstances (i.e. restructuring of the company, relocation or bankruptcy),
- The employee is sick or disabled for more than two years,
- The employee is frequently absent due to illness or disability, which has a negative impact on business operations,
- The employee’s performance is unsatisfactory,
- The employee commits willful misconduct or is culpably negligent (i.e. commits theft or comes to work drunk),
- The employee refuses to perform his or her contractual duties due to conscientious objection, or
- The working relationship is damaged beyond repair.
Any time an employment contract is terminated on the employer’s initiative for reasons other than the employee’s conduct, regardless of the length of employment, the employee is entitled to severance pay. Under the WAB, there is an option for Dutch employers to request that an employee be dismissed from employment on a combination of grounds that would not normally be sufficient grounds for dismissal on their own, known as “cumulative grounds.” If the court grants a termination of the employment contract on cumulative grounds, the employee may be awarded extra compensation on top of their severance payment.
Dismissal After Long-Term Illness
Dutch employment laws prohibit employers from terminating the employment contracts of employees on sick leave under most circumstances. However, after 104 weeks (two years) of illness or disability, employers are permitted to request a termination of the employment contract, so long as they have met all of their obligations during the sick-leave period, including taking every possible measure to get the employee back to work as quickly as possible. Any time an employee in the Netherlands is involuntary dismissed after two or more years due to a long-term illness or incapacity for work, he or she is entitled to severance pay for the full period of employment. Under Dutch employment law, employers are required to pay this severance payment within one month of dismissal.
As of April 2020, employers can now apply to be reimbursed for any transition compensation paid to long-term ill employees for dismissals dating back to July 1, 2015. The following are the conditions required for obtaining compensation under this new Transitional Compensation Fee Scheme:
- The employee is no longer needed due to long-term illness or disability (redundancy),
- The employee was entitled to transition pay, and
- The employer paid the requisite transition compensation.
Settlement Agreements and Termination by Mutual Consent
Many employment contracts in the Netherlands are terminated by means of a settlement agreement, in which case both parties come to an amicable agreement to end the working relationship, known as “mutual consent.” A settlement agreement, or termination agreement, is a legally binding agreement between an employer and employee that outlines the conditions of termination of the employment contract in the case of redundancy or involuntary unemployment. If you agree to terminate your employment contract by mutual consent, it is in your best interest to retain the services of an attorney who specializes in settlement agreements, to ensure that your legal rights are protected. An experienced attorney can explain your rights under the law, advise you on what constitutes a fair settlement, and negotiate on your behalf, if necessary.
Find Out if You are Entitled to Severance Pay
Employment laws in the Netherlands are extremely protective of employees and there are strict regulations in place pertaining to the termination of an employee’s employment contract. One of the most important employment issues covered by the new Labor Market in Balance Act in the Netherlands is the responsibility of an employer to compensate employees for lost income following an involuntarily layoff or job loss. If you have been involuntarily dismissed from your job in the Netherlands at your employer’s initiative, or if your employment contract was not renewed, you may qualify for severance pay. Contact our knowledgeable employment law attorneys today to find out what kind of severance package you are entitled to collect from your employer.