Understanding Severance Pay Requirements in Western Europe
The European Union has some of the most generous employee benefits in the world. When it comes to taking care of its workers, Western Europe has adopted legislation aimed at maximizing the attraction, retention and engagement of workers and at creating value for both employees and employers alike. Labor laws adopted by the Netherlands and other Member States in recent years have sought to provide employees with a higher quality work environment, better workplace protections and more robust employment rights, including the right to financial compensation upon the termination of an employment relationship.
It is in an employer’s best interest to take care of exiting employees. After all, research shows that the way employers handle separating an employee from an organization can have an effect on future retention and recruitment efforts as well as the engagement of remaining employees. However, some employers may try to deny departing employees the benefits they are legally entitled to. Fortunately, there are laws in place in the Netherlands and throughout Western Europe that dictate the rights of workers during the course of their employment and in the event that their employment contract is terminated, including their right to collect severance pay.
What is Severance Pay?
Severance pay is a lump-sum payment that an employer may be legally required to pay an employee in the event that the employment relationship is terminated by the employer for reasons that do not include the culpable behavior of the employee. Severance pay is meant to compensate the employee for loss of income due to the involuntary termination of employment, which may occur for any number of reasons, including but not limited to the following:
- Reduction in workforce
- Restructuring of the organization
- Elimination of the employee’s position
- Relocation of the business
- Mergers and acquisitions
- Leadership change
- Poor company performance
Who is Entitled to Severance Pay?
In most Western European countries, employees are legally entitled to severance pay in the event of a collective dismissal (due to restructuring events or the shutdown of certain departments or locations) or individual termination of employment for a reason that is not related to the employee’s performance. Although the regulation of statutory severance pay varies from country to country, severance payments are typically reserved for cases where an employee is dismissed for economic reasons, rather than for disciplinary reasons. In other words, if an employee is dismissed because of misconduct, he or she may not be entitled to severance pay.
In Western Europe, there has been a push in recent years to provide better protections for employees. This is especially true in the Netherlands, where new legislation took effect on January 1, 2020, aimed at encouraging employers to sign indefinite-term employment agreements, rather than fixed-term contracts. Under these new laws, from the first day of employment, an employee in the Netherlands is eligible for a statutory severance payment, called a transition payment, in the event of a dismissal that is initiated by the employer. Under the old law, only employees who worked for at least two years were entitled to severance pay.
In some countries, there are other circumstances under which an employee may be eligible for severance pay. For instance, new labor laws in the Netherlands allow employers to request a dismissal from employment on a combination of grounds that, on their own, would not necessarily be sufficient grounds for dismissal. If the court agrees to terminate the employment contract based on this so-called “cumulative ground,” the employee may be awarded a severance payment on top of the transition payment triggered by the dismissal.
How is Severance Pay Calculated?
In many countries, severance pay is calculated based on the employee’s number of years of service with the company. In France, for example, employees who have worked for up to five years with a company are entitled to severance pay amounting to a maximum of one month’s salary, while in Luxembourg, employees must have a minimum of five years working with the company before being eligible for severance pay. In the UK, severance pay depends not only on the employee’s years of service, but also on his or her age. Employees between the ages of 18 and 21 are entitled to half a week’s pay for each full year of employment, while those between the ages of 22 and 40 are entitled to one week’s pay, and those over the age of 40 are entitled to one and one-half week’s pay for each full year of employment.
In the Netherlands, under the new Balanced Labour Market Act (Wet Arbeidsmarkt in Balans or WAB), employees are entitled to severance pay from day one of their employment, including any probationary period, regardless of their age or duration of service. There, an employee’s severance payment is calculated based on one-third of his or her monthly salary for each full year of employment, regardless of the number of years of employment, plus a pro-rated payment for each additional month or day of service short of a full year. Previously, employees age 50 or older were entitled to greater compensation for severance pay, but under the WAB, that differentiation disappears.
Some countries have established a cap on severance payments, which may be calculated based on the consumer price index (in the UK, for example) or the national minimum wage (in Portugal and Poland). In the Netherlands, the maximum severance payment is legally capped at EUR 81,000 or one year’s salary, whichever is higher.
How Long Do I Have to Claim Severance Pay?
In order to recover the severance pay you are entitled to following a dismissal from employment, you have to file a claim with your former employer, also known as a collection obligation. Employees in the Netherlands have only three months after their last working day to claim their severance pay before their right to compensation lapses. If you are entitled to severance pay in the Netherlands and your former employer refuses to pay, you may have grounds to file a lawsuit for breach of contract in order to collect the compensation you are owed.