Personnel: The government intends to limit the expenses of employers in case of dismissal due to long-term illness and economic circumstances

Publication date: 10 November 2016
A recently published bill contains a scheme for transition compensation in case of long-term illness and dismissal due to economic circumstances. What do these arrangements include and when can you, as an employer, make use of them?

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The employer owes transition compensation if he or she terminates the employment contract or does not renew a fixed-term employment contract. In addition, the employment contract must have existed for at least two years. Transition compensation is also to be paid after two years of illness and in case of dismissal due to economic circumstances.

There has been a lot of protest against this scheme, especially from employers. In the first case, the employer must pay the employee a sum of money once more while salary had been paid continuously for two years, without the benefit of work – not to mention potential additional reintegration costs. In the second case money must be paid, when the reason for dismissal is that there is insufficient money to keep the employee in service. The obligation to compensation makes it less attractive to employers to give employees a permanent position and has led to constructions to get round having to pay transition compensation. For instance, sick employees are not dismissed after two years, but the employment is maintained “dormant”.

To meet the objections, a legislative proposal has been published recently. This bill contains arrangements for the transition compensation in case of long-term illness and dismissal due to economic circumstances.

Compensation in case of long-term illness

The bill intends to ease the burden of employers by becoming entitled to compensation of the – in principal, entire – amount of transition compensation in case of dismissal due to long-term illness.

The employer is entitled to compensation if (1) the employee is dismissed after two years of service, (2) he or she is unable to work due to illness, and (3) the employer has paid the employee a compensation regarding the termination of the employment contract.

The compensation scheme does also apply if an employee with a fixed-term employment contract of a minimum of two years leaves the service ill.

Has the employment been terminated with a settlement agreement and has compensation been paid? This amount qualifies for compensation as well.

The maximum of the compensation amounts to,

  • The transition compensation legally due upon the end of the obligation to continue to pay wages, or
  • The amount the employee received during illness, except for an extension of the period in which the employer is obliged to continue to pay an employee’s salary.

The compensation equals the lower of the two aforementioned amounts, which will be the transition compensation in most cases. There will be compensation of the continuously paid salary if the obligation to continue to pay wages during illness is limited. This is the case, for instance, in fixed-term employment contracts that have almost come to an end or regarding a domestic help who must be continued to be paid salary in case of illness for a period of six weeks only.

The Employee Insurance Agency (UWV) will provide the compensation from the General Unemployment Fund (Awf). As a consequence the contribution will be increased.

The entitlement to compensation will enter into force with retroactive effect from 1 July 2015. If you, as an employer, have paid (transition) compensation following termination or non-renewal of the employment contract due to long-term illness after 1 July 2015, you may qualify for compensation.

Collective agreement arrangement for dismissal due to economic circumstances

Currently, employers can take measures in a collective employment agreement replacing the transition compensation owed, for instance, with their own compensation arrangements, training facilities, outplacement or unemployment benefits outside the statutory system. The condition for this is that the capitalised value of the respective provisions equals the amount an employee would receive in transition compensation.

In the legislative proposal the possibility for alternative arrangements is limited to cases in which the employment contract is terminated due to economic circumstances. In addition, the condition that the arrangement must equal the transition compensation is waived. As a result, parties to collective agreements are free to determine the content and scope of a collective agreement arrangement and who is liable to pay such an arrangement. For instance, this could be a fund to which employers make an annual contribution instead of the individual employer. Especially for industries with many small companies this could be an attractive option. These changes apply to new collective agreements only.

When?

Both schemes are intended to enter into force as of 1 January 2019.

More information

Would you like to learn more about the entitlement to transition compensation after two years of illness or dismissal due to business reasons? Or do you have any questions regarding the arrangements referred to in this article? Please contact Russell Advocaten:

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