New bill about long-awaited measures transition allowance

The Dutch Minister of Social Affairs and Employment announced in April 2016 already that the government intended to make a number of changes to the Wet werk en zekerheid (Work and Security Act). The bill in question proposes measures regarding the payment of a transition allowance in the event of dismissal for economic reasons or on the grounds of long-term incapacity for work.

Dismissal due to long-term incapacity for work

A transition allowance is payable when an employer terminates an employment contract, when the contract is dissolved (ontbinden) on the employer’s initiative and when a temporary employment contract is not extended on the employer’s initiative. In principle, the transition allowance is always payable, i.e, also if the employment contract is terminated because the employee is sick and cannot return to his or her own position or be reassigned to another position.

In practice, many employers consider the payment of the transition allowance unjustified when an employee is dismissed on the grounds of long-term incapacity for work, because by that time they have often continued the employee’s salary payments for two years already and have incurred significant costs with a view to the employee’s reintegration.

In the past the solution was to keep the employee in “dormant employment”, whereby the employee did not perform any work but was not dismissed either. The compulsory sick pay has then ended but no transition allowance is payable by the employer because the employment relationship remains in force. But the employees in question often regard this as abuse of circumstances. The government has now proposed a measure in which the employment relationship is terminated and the transition allowance is paid, but the employer is compensated for the costs involved.

The bill proposes compensating the employer for all the costs of the transition allowance. That compensation will be paid by the UWV (Employee Insurance Agency) out of the Algemeen Werkloosheidsfonds (General Unemployment Fund). That fund will be supplemented by means of a uniform increase in the contributions. To avoid abuse, the amount of the compensation has of course been capped. For instance, the compensation will in no event exceed the transition allowance to which the employee would have been entitled if the obligation to continue to pay wages had stopped and the compensation will in no event exceed the wages that would have been paid during sickness.

If the period during which the employer is obligated to continue to pay an employee’s salary has been extended, that extended period will not be taken into account. Moreover, if an employer has provided incorrect information (intentionally or unintentionally), lower compensation will be paid or the employer will have to repay part of the compensation.

Dismissal for economic reasons

Small and medium-sized enterprises had concerns not only about the transition allowance in the event of dismissal after long-term incapacity for work, but also about a transition allowance being due in the event of dismissal for economic reasons. The reason for this is that such dismissals are usually necessitated by unavoidable cost savings. Transition allowances are not conducive to such costs savings, for which reason measures have now been proposed on this point also.

In the event of dismissal for economic reasons, the transition allowance is also payable if an employee has been in the employer’s service for two years or longer. This may place too great a burden on employers if the company is faced with financial difficulties and payment of the transition allowance would  give rise to further problems for the employer. Under the current arrangement an employee is not entitled to the transition allowance if similar agreements have been made in a collective agreement or in the individual employment contract. The arrangement in the collective agreement must then be equivalent, however.

In the new scheme the (capitalised) value of the arrangement under the collective agreement need no longer be equivalent to the transition allowance. Parties to a collective agreement are therefore given more freedom. The scheme may even comprise no more than a work-to-work arrangement without any financial compensation. In sum, this significantly broadens the possibilities. But the collective agreement may be departed from only in the case of dismissal for economic reasons, not in the case of dismissal on the other grounds set out in Section 7:669 (3) of the Dutch Civil Code, such as poor performance.

The bill is not expected to be enacted until 1 January 2018, but will have retroactive effect with regard to the compensation scheme from 1 July 2015.

For more information on this subject please contact Wouter Engelsman or Isabel Somers.