Redundancy payments in the Netherlands

In the absence of mutual agreement or just cause the employer may generally not terminate the contract of employment without a permit, to be obtained from the Dutch Dismissal Authority. An alternative is to ask the competent Court to dissolve the employment contract. The Court may order the employer to pay compensation for the redundancy. The standard calculation of redundancy packages as used by the Dutch courts also often forms the basis of voluntary redundancy payment schemes.

When is a redundancy payment due?

There is no legally binding statutory redundancy payment scheme in The Netherlands. The employer must, however, make a redundancy payment if:

• The employer has filed a petition to dissolve the employment contract.
• The Court grants the peitition and orders the employer to pay compensation.
• The employer decides not to withdraw the petition and therefore accepts the award made by the Court on dissolution of the employment contract.

What compensation can be expected?

Statute provides that it is up to the Court to determine the amount of a fair and adequate redundancy payment. The judge will have to weigh all circumstances of the case. In the past this has lead to various approaches by different local courts, which sometimes had negative effects, such as surprise decisions and a tendency by clever lawyers towards forum shopping, for better results. To avoid that and to have better guidance the joint Cantonal Courts of the Netherlands created the so called Cantonal Court Formula as a guideline, which since then is most usually applied to determine the level of compensation an employer must pay to an employee that is laid off. Although this is non-binding quasi legislation, the Cantonal Court Formula is now broadly used by all Courts, and also by employers and employees to negotiate a termination agreement with severance payment.

The Dutch Cantonal Court Formula

The Cantonal Court Formula fixes the redundancy payment at a number of months salary. The exact severance payment is determined by multiplying three factors: A, B and C, where:

• The A-factor is the adjusted number of years of service of the employee. The years of service up to age 35 will count as 0.5, the years of service between 35 and 45 years of age will count as 1, the years of service between ages 45 and 55 will count as 1.5 and the years of service above age 55 will count as 2.
• The B-factor is the corrected monthly gross salary, which includes fixed components like holiday allowance.
• The C-factor is a correction factor that is usually 1.0 (neutral dissolution), but may be fixed at a higher or lower level by the Court in order to come to a fair and adequate severance payment. Behaviour of employer and eployee, the job market position of the employee and the financial position of the employer may all play a role, which makes the C-factor the least certain factor of the formula.

What if I need to down size my company?

As no statutory provisions exist regarding the calculation of redundancy payments in case of dismissals, it is up to the parties involved to negotiate a redundancy scheme. This can be done at an individual level in case of small companies and incidental dismissals. Dependent on the circumstances this can be arranged within weeks, especially where a fair and balanced offer is made to the employees involved. If the company is in serious financial trouble, it may be advisable to obtain a permit to dismiss the employees involved, rather than following dissolution proceedings in court. We can advise you on the best course of action in your individual circumstances

Collective dismissals

Redundancy schemes should be negotiated with trade unions where required by the applicable rules and regulations, usually in case of collective dismissals. The Cantonal Court Formula often serves as a basis for negotiations, but results can vary significantly as other factors like the available budget play a role too. In case of collective dismissals the parties usually negotiate a “Social Plan” containing a redundancy scheme. A social plan specifies the agreed redundancy regulations that should be followed in case of dismissals and procedures that will assist redundant employees in finding new jobs.

Further information

It is advisable to consult us before taking any major decision with regard to terminating employment contracts for Dutch employees. For further information regarding Dutch Employment Law, please contact our contact person of the Labour and Employment Law Practice Group.