Background 

Since the implementation of the Work and Security Act (Wet Werk en Zekerheid) employees are in principle entitled to a transition payment if, at the initiative of the employer, the employment agreement is terminated or dissolved, or not extended in case of an employment agreement for a fixed term.

The employer is also obliged to pay the transition payment in case the employment agreement is terminated by the employer due to long-term illness (i.e. after two years of illness). Many employers viewed this as being unfair, given that they had already paid the employee’s salary and incurred reintegration costs during the period of two years of illness. This deterred many employers from terminating the employment agreements of employees who were on long-term sick leave, resulting in many ‘dormant employment agreements’. In such cases, the employment agreement formally remained in place, but no work was being performed and the employer was no longer obliged to continue paying wages.

In April 2020, the compensation scheme was introduced to prevent these dormant employment agreements and to accommodate to the interests of employers. Under the compensation scheme, subject to certain conditions, employers could claim compensation for the transition payment they have paid in relation to the termination of the employment agreement due to long-term illness.

Reason for the legislative proposal

Limiting the compensation scheme is a cost-cutting measure, which was already announced in the ‘outline agreement’ (hoofdlijnenakkoord) and which was part of the coalition program, and subsequently incorporated into the budget of the Ministry of Social Affairs and Employment.

According to the government, medium and large-sized employers are expected to have sufficient financial capacity to pay the transition payment without receiving compensation. On the other hand, for smaller employers this is a relatively large expense. The government therefore wants to continue supporting this group of employers by maintaining the compensation scheme for them.

Key components of the legislative proposal

The legislative proposal aims to limit the compensation scheme to employers who are categorized as ‘small’ by the Dutch Tax Authority. This categorization is based on the employer's total wage subject to social security contributions over the past two years. Employers with a wage bill of up to 25 times the average wage on which social security contributions are payable are considered small employers.

In addition to the aforementioned compensation scheme, there is also a compensation scheme for the transition payment in the event of dismissal due to the termination of business operations as a result of retirement or death. This already applies exclusively to small employers. However, the definition of a small employer in this scheme is linked to the number of employees and not the total wage sum subject to social security contributions. The legislative proposal amends this definition so that it will be the same as the definition of a small employer in the other scheme.

Points of attention

If the legislative proposal is adopted (in its current form), we believe it will not only affect medium and large-sized employers, but also their sick employees.

Because medium-sized and large employers will no longer be eligible to receive compensation under the compensation scheme for termination of employment agreements due to long-term illness, many of these employers will most likely no longer terminate the employment agreement after two years of illness. Instead, they will let the agreement continue as a dormant employment agreement, as a result of which these employees will not receive a transition payment.

Regarding these dormant employment agreements, the Dutch Supreme Court had previously ruled that an employer – based on the principle of good employment practices – is obliged to agree to a reasonable proposal from an employee to terminate a dormant employment agreement, including payment of a transition payment (the Xella ruling of 8 November 2019). However, as was confirmed once again by the Supreme Court in 2022, this obligation of employers was based on the fact that an employer was compensated for the transition payment, and therefore, in principle, had no reasonable interest in the continuation of the employment agreement.

Although in the explanatory memorandum (memorie van toelichting) it is recognised that limiting the possibility for statutory compensation may influence the effect or scope of the standard developed in case law, it is also indicated that the government wants to emphasise that it is preferable that employers, regardless of their possible right to compensation, cooperate in the termination of employment agreements with employees who are on long-term sick leave. However, it remains to be seen whether these employers will comply with the government's call.

If medium and large-sized employers are no longer compensated, we believe that it will be difficult to continue to oblige them to agree to termination of the employment agreements after two years of illness on the basis of the aforementioned statements regarding good employment practices. This would mean that sick employees working for a medium or large-sized employer could not demand their employer to terminate the employment agreement after two years of illness in order to qualify for a transition payment, while employees of a small employer could still do so.

Next steps

The internet consultation ends on 19 March 2025. Until then, it is possible to respond to the legislative proposal. It is possible that the legislative proposal will be amended in reaction to these responses. The legislative proposal is expected to be submitted to the Dutch House of Representatives (Tweede Kamer) in the fourth quarter of 2025. After the legislative proposal has passed the House of Representatives, the proposal must also be approved by the Dutch Senate (Eerste Kamer) before it can enter into force.

We will of course continue to closely monitor the developments concerning this legislative proposal. If you have any questions following this news blog, please feel free to contact us.