Termination agreement


What should be included in the termination agreement?

1 Termination date

This is an important issue in the termination agreement. Every month an employer has to pay salary and employment benefits for an employee he wants to let go is expensive. The employee often prefers to stay as long as possible on the pay roll, to be able to find another job whilst employed and paid.

Notice period

The applicable notice period has to be observed. Dutch law has the following notice periods:

Less than 5 years: 1 month

5-10 years: 2 months

10-15 years: 3 months

More than 15 years: 4 months

Please note that in a Collective Labour Agreement (CLA) or in an individual employment agreement, a different notice period can be included.

Only full months count for the notice period.

Example: a notice period of 2 months applies. The employer offers a termination agreement to the employee on 3 February 2020, with termination date 1 April 2020. Only the (full) month March 2020 counts as to the notice period. The (incomplete) month February 2020 does not count for the notice period. The termination date should not have been 1 April 2020, but 1 May 2020: in that event, the months March and April count and the statutory notice period of 2 months is observed.

Not observing the notice period can cost the employee unemployment benefits

For the employee it is very important that the correct notice period is observed in the termination agreement.

Example: Dave is offered a termination agreement after 12 years of service at his employer. He signs a termination agreement on 27 January 2020. The termination date is 1 March 2020. Only the (full) month February 2020 counts for the notice period. The unemployment benefits (WW) start per 1 May 2020. Over the period 1 March 2020 – 1 May 2020 Dave lacks any salary payments or unemployment benefits. Dave could have prevented this by agreeing to a termination agreement that observed the notice period, with 1 May 2020 as termination date.

Employee can be relieved of duties

Very often in the termination agreement a provision is included to relieve the employee of his duties before the termination date. That fact that an employer decided the employee had to go, affects the mood in the workplace. For the employer, it can be preferable that the employee is not around anymore. The employee often is less motivated and prefers not to perform duties anymore.

Therefore, it can be advisable to agree to relieve the employee of the duties he performs. For instance, this is the signing date of the agreement, or another date before the termination date. In addition, it can be agreed that the employee hands over his activities properly or remains available for questions if necessary.

Entitlement to Unemployment Benefits (WW: Werkloosheidswet)

One of the most important matters to lay down in a termination agreement is the entitlement of the employee to Unemployment Benefits (WW). SA government agency, the UWV, decides as to Unemployment Benefits. The UWV mainly looks at two things:

  • the employer initiated the dismissal (if the employee gives notice himself, there is no entitlement to unemployment benefits);
  • there is no gross misconduct on behalf of the employee (“dringende reden”). The government thinks it’s not appropriate to “reward” bad behavior with benefits.

Usually it is laid down in the recitals of the termination agreement that the dismissal is the initiative of the employer and that the employee is not liable for the dismissal.

There are generally 2 options used to safeguard this: (1) irreconcilable differences or (2) company economic reasons for the dismissal. In the recitals, often boilerplate texts are used that don’t necessarily reflect the specific situation.

Amount of Unemployment Benefits

In principle, the employee is entitled to unemployment benefits after properly concluding into a termination agreement with his employer. During the first 2 months of unemployment, benefits are 75 % of the salary, subsequently it’s 70 % of the salary. However, there is a cap of these amounts that affects higher earners.

Unemployment benefits after instant dismissal?

In the event of gross misconduct on behalf of the employee and a consequent instant dismissal, there is (in principle) no entitlement to unemployment benefits. However, of the employer and the employee agree to a termination agreement and the employer withdraws the instant dismissal, the employee can apply for unemployment benefits.

3 Severance compensation

The employer and employee can agree to a severance compensation, which needs to be laid down in the termination agreement.

What amount should the severance payment be? The statutory severance payment Courts apply (“transitievergoeding”) bears some relevance: this amounts to one sixth salary per 6 months of employment.

However, other factors are equally important. If the employer does not have proper grounds for termination, a higher settlement compensation can be negotiated by the employee. In that event, the Court would not terminate the employment agreement. In negotiations, a lack of grounds can be compensated by a (substantially) higher severance compensation.

If there is gross misconduct by the employee, parties can agree to a termination agreement while abstaining from a severance payment. This way, the unemployment benefits of the employee are safeguarded and the employer can dismiss the employee without a payment or Court proceedings.

The amount of severance compensation is therefore completely situational. Very often this is a contentious issue in termination negotiations. For both parties, there are direct financial implications.

For tax reasons, the severance payment if usually paid within the first month after the termination date.

It is possible to include in the agreement that the employee should repay (a part of) the severance payment if he succeeds in finding other employment before the termination date.

4 Final settlement

An issue that cannot be overlooked in the agreement is the final settlement. Usually, this is effected in the first month after the termination date.

The employer and the employee can make arrangements as to holidays to be paid out, holiday allowance and bonuses. It’s important to include these and to avoid any loose ends.

5 Clauses in the employment agreement

If the employment agreement includes a non-compete clause of a business relations clause, it’s important to make concrete arrangements about these topics in the termination agreement.

In the event of a reorganization, usually employees are discharged from the non compete clause. However, an employer can have a substantial interest to have the clause remain in force.

A study costs clause also needs attention. Is it reasonable that the employee remains obliged to pay back the costs of an expensive course, or should the employee be relieved of this obligation?

6 Pension scheme

In principle, the participation of the employee ion the pension scheme will end on the termination date. However, exceptions in the pension scheme may apply.

The damage inflicted by the termination of the pension accrual may be included in negotiations about the severance payment.

7 Costs of legal advice

Almost every termination agreement includes a clause that covers the costs of legal advice made by the employee.

For the employee this is very important: this provision means that he doesn’t need to pay these costs out of his net income. For the employer, these costs are deductible from the profits.

The invoice has to be in the name of the employee. Dutch tax law does not allow putting the invoice in the name of the employer. Hence, the employer cannot deduct the VAT.

Because of the numerous issues that need to be addressed in the termination agreement, for both employer and employee it is sensible to get representation of a specialized lawyer.

8 Illness

In principle, an ill employee is not allowed to agree to a termination agreement. If he does, he will be refused unemployment benefits (WW) or sickness benefits. In the event the disease is related to the workplace, it makes sense to agree to a termination of employment. Usually in such an event the employer and the employee agree that the employee officially returns from sick leave, after which the employer and the employee can agree to a termination agreement.

In the event the employee falls ill within 4 weeks after the termination date, the employer remains responsible for the reintegration of the employee in the workplace. Therefore, this needs to be addressed in the termination agreement.

9 Employer property

Usually, the employee has properties of the employer during the course of employment. Things like laptops and keys have to be returned. Arrangements for a pending car lease contract may be necessary.

10 References

The employee will probably (at some point) resume his career at another employer. A positive reference letter is therefore in his interest.

Dutch employment law only requires the employer to provide a neutral yet truthful reference letter. The employee will want to include a provision that guarantees a positive reference letter.

11 Confidentiality

A clause regarding confidentiality is a standard clause in a termination agreement. The agreement is the conclusion after a period of negotiations. Both parties want to focus on the future and usually don’t want third parties to know about the dismissal or its details.

The employee can however always provide information to the UWV in order to apply for unemployment benefits.

12 Final discharge

The termination agreement is meant to end the dispute as to the dismissal. Both parties will want to close the book. Therefore, a clause of final discharge (Dutch: “finale kwijting”) is included in most termination agreements. It means that the parties have no further claims against each other outside the termination agreement.

Be careful

This means the employer and the employee need to pay attention. In principle, a claim to the other party cannot be presented after conclusion of the termination agreement. An employer that, after a few months, finds out that his employee caused even more damage: bad luck. An employee finding out, after signing the agreement, that he has been underpaid for years: too bad.

However, it is possible for parties to deviate from the final discharge in the agreement, so there is room for certain future claims.

13 Reflection period

The termination agreement has to mention the statutory reflection period of 2 weeks. During these 2 weeks after signing, the employee can dissolve the termination agreement. No ground is required. The employee just has to simply write a letter to the employer. As a consequence, there is no longer a termination agreement between parties. As a consequence, the employer can decide to go to Court to achieve a dismissal of the employee.

If the termination agreement fails to mention the 2 week reflection period, the reflection period will last for 3 weeks. The reflection period cannot be excluded in the agreement.