Compensation Schemes and Transition Payments for Employees with a Long-Term Illness
Effective April 1, 2020, employers in the Netherlands have the right to request compensation for transition payments they were required to pay out upon dismissing employees with a long-term illness or disability. The new compensation scheme is part of the Balanced Labour Market Act (Wet Arbeidsmarkt in Balans, or WAB), which seeks to bring balance to the labor market and create opportunities for both employees and employers. Dutch dismissal law is notoriously protective of employees and it is important for employees in the Netherlands to understand their rights and obligations under the law, especially as it pertains to their salary and eligibility for transition payments and severance pay. For instance, employees suffering from a long-term illness who are not able to return to work are entitled to receive a portion of their salary payments for two years. If they have their employment contract terminated after two years, they are entitled to transition pay at that time.
Dutch Work and Social Security Act of 2015
At its core, the Balanced Labour Market Act seeks to resolve some of the negative effects of the Dutch Work and Social Security Act, which has been the subject of substantial criticism since its introduction nearly five years ago. The Dutch Work and Social Security Act, which entered into force on July 1, 2015, executed the first significant changes to Dutch labor laws since 1945. The chief purpose of the Act was to overhaul employment termination law, making dismissal laws simpler, more equitable for employees and less costly for employers at the same time. Unfortunately, it ended up having the opposite effect. Dismissal laws became more complicated, expensive and time-consuming for employers and there was increased pressure on legislators to implement additional reforms, where is where the WAB comes in.
Balanced Labour Market Act of 2020
The main focus of the Balanced Labour Market Act is to encourage employers to enter into indefinite-term (permanent) employment contracts, as opposed to the fixed-term (temporary) contracts that have become popular with employers in recent years. One way the Act does this is by making employees in the Netherlands eligible for transition pay from their first day of employment, rather than after two years of employment. The Act also introduces new grounds for dismissal and extends the limitation on successive fixed-term employment contracts, among other changes. In implementing these changes, the Dutch government seeks to bridge the gap between employees with temporary employment contracts and employees with permanent contracts with regard to their financial compensation and legal protections.
Transition Payments for Long-Term Ill Employees
In the Netherlands, employees suffering from a long-term illness are entitled to continue receiving salary payments for a maximum period of 104 weeks (two years) while on sick leave. After 104 weeks, if the employer has met all obligations during the sick-leave period, the employer can legally terminate the employment relationship with the permission of the Dutch Employee Insurance Agency (Uitvoeringsinstituut Werknemersverzekeringen, or UWV). Upon termination of the contract, the employee is entitled to collect a transition payment, which must be issued within one month of the termination. The transition pay requirement in this situation has been the subject of a great deal of criticism, seen by some as burdensome to employers, and it has led some employers to prolong employment (keep the employment relationship dormant) in order to avoid having to pay the transition fee.
Compensation of Transition Payment for Long-Term Illness
The Dutch government considers this dormant employment relationship situation disagreeable and, as part of the Balanced Labour Market Act, accepted a new compensation arrangement that applies to situations where an employee’s employment contract is terminated due to a long-term illness. According to the new Transitional Compensation Fee Scheme, employers can reclaim the transition fee for a long-term incapacitated employee regardless of the manner in which the employment was terminated – by UWV decision, by court verdict or by means of a settlement agreement between the employer and employee.
As of April 1, 2020, employers in the Netherlands are permitted to submit a request for reimbursement from the UWV for transition fees they paid out in cases where an employment contract was terminated due to long-term illness or disability. This new compensation law is implemented with retroactive effect from July 1, 2015. The conditions for obtaining compensation under the Transitional Compensation Fee Scheme are as follows:
- The ill employee has been made redundant (is no longer needed) due to long-term illness,
- The employee was eligible for transition payment under Dutch labor law, and
- The employer paid this employee the requisite transition payment.
What the New Compensation Scheme Means for Employees, Employers
Like many of the new measures implemented as part of the Balanced Labour Market Act, this new Transitional Compensation Fee Scheme is intended to benefit both employers and employees in the Netherlands. In adopting this new law, the Dutch government aims to prevent employers from facing additional costs after paying the wages of ill employees on sick leave for two years. At the same time, it seeks to ensure that employees with long-term illnesses are not forced to endure continuing uncertainty in cases where employers choose to keep the employment relationship dormant rather than incur the cost of a transition payment.
It remains unclear whether this new employer compensation scheme for transition payments related to long-term illness means that employers are obliged to end the employment contract after two years of paid sick leave. In March 2019, the court in Den Haag ruled in a lawsuit that prolonging employment or keeping an employment contract dormant after two years of illness to avoid paying a transition fee to an incapacitated employee is contrary to good employer standards. Prior rulings, however, determined that an employee was not entitled to dismissal for the purpose of receiving a transition payment. It is likely that the Dutch Supreme Court will be asked to issue a preliminary ruling on this important employment matter in the near future.