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Termination of employment in the Netherlands after 1 January 2020?

One of the changes involved in the Balanced Labour Market Act (In Dutch: Wet Arbeidsmarkt in Balans, WAB) relates to the transition allowance that employers are required to pay to an employee leaving the company.

What will change?

If the employment contract is terminated before 1 January 2020, no transition allowance is due if the employee had been employed by the company for less than two years. As from 1 January 2020, from the first working day onwards, an employee is entitled to a transition allowance upon termination of employment, even during the trial period! The period prior to the transition allowance is no longer rounded to half years; instead, it is calculated on the actual contract term (prorated).

On the other hand, the employer will pay a lower transition allowance from 1 January 2020 onwards. For each employment year, a 1/3 gross monthly salary is applied, also for the years after 10 years of employment. Up to 1 January 2020, employers pay a half gross monthly salary after 10 years of employment for each service year; for employees over age 50, this may even run up to 1 gross monthly salary per service year.

In which situations is the employee entitled to a transition allowance?

In principle, the transition allowance applies for any form of involuntary termination of employment, also if a temporary employment contract is not renewed. This transition allowance is paid out both after permission issued by UWV (Employee Insurance Administration Agency) and after the District Court’s ruling.

Some exceptions apply, for example:

  • if the employee terminates the employment contract or in the event of termination of employment with immediate effect;
  • the termination of employment is mostly due to the employee’s behaviour;
  • the employee is under age 18 and works for the employer fewer than 12 hours per week;
  • the employee has reached the standard retirement age on the date of termination of employment;
  • the employer is bankrupt or in the process of debt restructuring.

How do you calculate the amount of the transition allowance from 1 January 2020?

This is calculated on the full duration of the employment. For each service year, the employee is entitled to one-third of a gross monthly salary. For the remaining portion, or if the employment was shorter than one year, the transition allowance is prorated.

For a fixed number of contractual working hours, you add up the following elements (if applicable), in order to come to the gross monthly salary:

  • Fixed allowances
    • fixed gross monthly salary
    • holiday allowance
    • fixed year-end gratuity
  • Average variable shift allowance or overtime allowance on a monthly basis
    Determine the total amount for the 12 months (or shorter period if employed shorter than one year) received prior to the date of termination and divide by 12.
  • Average bonus, commission, profit share or variable year-end gratuity on a monthly basis
    Determine the amount that the employee received in the 36 months prior to the calendar year in which the contract ended and divide by 36 (or lower number if employed shorter than 36 months).

number of full-service years x 1/3 gross monthly salary

(Gross salary on the entire period employed / gross monthly salary) x (1/3 gross monthly salary/12)

Add up the outcomes of steps 2 and 3. This provides an estimate of the transition allowance due.

Example:

An employee worked for an employer for 9 years and 4 months, earning a gross monthly salary of €3,000.

Step 1 – Calculate the gross monthly salary:
€3,000 gross monthly salary (including other allowances)

Step 2 – Calculate the allowance on the 9 full-service years:
Formula: number of full-service years x 1/3 gross monthly salary

Calculation of this example: 9 x (1/3 x €3,000) = €9,000

Step 3 – Calculate the allowance on the remaining 4 months:
Formula = (gross salary on the entire period employed / gross monthly salary) x (1/3 gross monthly salary/12)

Calculation of this example part 1:
Gross salary on the entire period employed = €12,000
Gross monthly salary = €3,000
€12,000 / €3,000 = 4

Calculation of this example part 2:
1/3 gross monthly salary = €1,000
€1,000 / 12 = €83.33

Final result: 4 x €83.33 = €333.33

Step 4 – Calculate the full transition allowance:
In this example, the total transition allowance amounts to €9,000 + €333.33 = €9,333.33

In situations without fixed contractual working hours, a different, more complex calculation is applied.

What is the maximum transition allowance?

The maximum for 2020 is set to €83,000 (gross). If the employee’s wage exceeds the annual maximum, the employee receives a maximum of one annual salary.

Please note: The employer may sometimes deduct certain costs from the transition allowance. This concerns costs incurred to prevent the employee from becoming unemployed, or to limit unemployment duration, or to increase the employee’s employability. This would include the cost of employability and employer-to-employer processes. It may be advisable to provide due assistance to the employee when starting a termination of employment procedure.

Please note: Sometimes, an employer has already paid a transition allowance to the employee due to termination of a previous employment contract. The amount paid out for this previous transition allowance may be deducted from the second transition allowance.

Would you like more information?

Please find more information in Dutch on the national government website: href=”https://www.rijksoverheid.nl/documenten/brochures/2019/10/04/wab-transitievergoeding”>https://www.rijksoverheid.nl/documenten/brochures/2019/10/04/wab-transitievergoeding

This website also offers calculation tools that provide an estimate of the transition allowance.

Finally, employers aiming to terminate a so-called ‘sleeping employment contract’ with an employee on long-term sick leave may be eligible for compensation under certain conditions. Click here for more information on this situation.

Would you like assistance relating to entering into or termination of an employment contract? Then please feel free to contact one of our consultants, Ewold Bom or Francesco Monteiro. They are happy to assist you.

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