Termination of employment in The Netherlands

United Kingdom

Termination indemnities to be paid in the case of the termination of an employment contract by the employer

Generally speaking, the termination of an employment contract cannot be achieved merely by the payment of indemnities. Termination must follow certain rules as set out in law and judicial opinion.



However, indemnities have to be paid:

  1. if the employer gives no or inadequate notice;
  2. in cases of manifestly unreasonable dismissal;
  3. in connection with a dissolution of the employment contract;
  4. as stated in the Social Plan

(a): no or inadequate notice
The law provides that both parties can terminate the employment contract at any times by giving notice. If the agreed notice period is not complied with, the employment contract may still be terminated. However, the party who does not comply with the notice period becomes liable to pay compensation.

This compensation is equivalent to the wages that would have been paid/earned if the correct notice period had been complied with.

The compensation will vary with the length of the notice period. There are statutory minimum notice periods:

  1. Employment contract which has lasted for less than 5 years: 1 month notice period;
  2. Employment contract which has lasted for a period of between 5 to 10 years: 2 months notice period;
  3. Employment contract that has lasted for a period of 10 to15 years: 3 months notice period;
  4. Employment contract that has lasted for 15 years or more: 4 months notice period.

These statutory notice periods can be extended and this extension must always be made in writing or in a collective bargaining agreement.

This extension cannot, however, be for longer than six months for the employee. In addition to that it must also be agreed that the employer's notice period must always be twice as long as that which applies to the employee.

The employer's notice to the employee can also be shortened but only in a collective bargaining agreement and with the additional stipulation that the notice period applicable at the time to the employer will not be any shorter than that which applies to the employee.

(b) Manifestly unreasonable dismissal
An employee whose employment contract is ended by the employer giving notice of termination can apply to court and request compensation or reinstatement.

For such compensation or reinstatement to be awarded, the competent court must judge the dismissal to be manifestly unreasonable. Manifestly unreasonable is understood to mean that the party who gives notice of termination could not have made this decision reasonably. This is a limited view by the court

From (case) law it appears that the court not only judges the dismissal itself but can also include in its deliberations an examination of the consequences of the termination for the employee. The employee can claim reasonable compensation from the employer, which will partially or wholly compensate him for the consequences of termination.

The right to claim that a dismissal is manifestly unreasonable lapses after six months calculated from the end of the employment contract.

(c) Dissolution
The law provides for a special means of dissolving the employment contract. Each party is entitled, at any time, to apply to the Sub district Court to request that the employment contract be dissolved for a 'serious reason'.

A serious reason can be an urgent reason, namely instant dismissal or a change in circumstances such that dissolution of the employment contract is the reasonable consequence. In the case of an instant dismissal the employer does not terminate the employment contract immediately but applies to the Sub district Court to dissolve the employment contract for the said reason.

If the employment contract is to be dissolved for an urgent reason, the employee may be liable to pay compensation if he has given the employer an urgent reason for dissolution due to his negligence or intent.

However, most proceedings in which the court is requested to dissolve the employment contract are based on a change in circumstances. This change can be due to economic reasons, frequent or long-term absence of the employee due to illness, etc. If the Sub district Court allows the dissolution of the employment contract by virtue of a change in circumstances, it is authorized to award reasonable and fair compensation to one party at the expense of the other. The Sub district Court does not have this option if the employment contract is dissolved for an urgent reason.

The reasonable compensation to be awarded by the Sub district Court is based on the so-called Sub district Court formula. This formula takes into account the number of years of service, the wages applying to the employee and an adjustment factor.

The age of the employee is an important factor when determining the number of years of service. The years of service, which the employee has worked before he reaches the age of 40, count once; years between the age of 40 and 50 count 1.5 times and the years of service above 50 years of age count twice.

Years of service of six months or more are rounded up to a full year and the reference date for the age of the employee is the presumed date of dissolution of the employment contract.

The employee's gross monthly salary is used as the basis on which the employee's wages are calculated, plus any fixed and agreed wage components such as holiday allowance, overtime pay and other fixed allowances. Fringe benefits such as company car, bonuses and profit sharing schemes are not included in the calculation nor is the premium for pension insurance.

Finally the Sub district Court determines the adjustment factor, which is fixed at one, if neither party is to blame for the dissolution of the employment contract. An example is a neutral circumstance such as a reorganisation, which the company considers necessary.

This adjustment factor can be varied upwards or downwards depending on the behaviour of the employer or the employee and also on specific circumstances such as the applicability or otherwise of a non-competition clause or other circumstances. This is irrespective of whether the application to dissolve the employment contract is requested by the employer or the employee.

Apart from the application of a non- competition clause, determining the level of compensation can also depend on whether there is a social plan or whether the employee has been offered outplacement counselling.

Although the compensation is determined according to a basic formula, the final result depends on reasonableness, fairness and numerous other circumstances.

Any reasonable compensation that the Sub district Court may award has an effect on the date on which the employee is able to receive benefits under the Unemployment Act. The benefits agency concerned will take into account the notice period applying to the employee; this also applies in cases were the employment contract is dissolved by the Sub district Court, where no notice period applies. In dissolution proceedings, the notional notice period is at least one month, during which the employee will not receive any benefits under the Unemployment Act. The employee must use any reasonable compensation as a source of income during this period.

(d) Social Plan
A social plan is generally drafted as a result of negotiations between the employer and the trade unions. Sometimes the employer and the Works Council draft a social plan.

In the case of a redundancy involving more than 20 employees, the Collective Dismissals legislation applies and the advice of the Works Council must be requested for giving termination, outplacement counselling, payment of pension premiums, etc.

The social plan contains provisions to prevent unemployment and redundancy payments. These payments are often based on the Sub district Court formula but the employer can also choose to offer the employees supplementary payment on the amount they will receive from unemployment benefits. The period of supplementing and the amount to be supplemented can be part of the negotiations.

II. These rules apply in matters of termination in employment agreements for definite and for indefinite time as well.

At the end of an employment contract for a fixed period, an employee cannot argue that the employer must give notice or that he has unreasonably given notice of termination. A contract for a fixed term ends by operation of law without requiring any action by either party.

A fixed term employment contract can be entered into for a specific number of months or years with an expiry date, for a specific project or piece of work (the moment at which the employment contract ends being clearly apparent) or for a specific situation, for example to replace another employee in the case of illness or holiday leave.

Employment contracts for a fixed term end by law unless there is a fourth employment contract for a definite period of time where the intervals between the various employment contracts do not exceed three months or the employment relationship has lasted for longer than 36 months (intervals of less than three months counted when calculating this period of 36 months).

If a fourth employment contract is entered into or the employment relationship between the parties has lasted for 36 months or longer the employment contract is deemed by law to be for an indefinite period of time.

Entering into a fixed-term employment contract does not prevent premature notice of termination from being given, provided that this has been agreed upon between the parties.

III. Termination during the trial period

The law states that the maximum trial period is two months. If a longer period is agreed upon between parties, the trial period as a whole is invalid.

During the trial period either party may terminate the agreement without observance of a notice period. Termination does not depend on permission being given by the Labour Office.

However, if the (party who has been terminated), requests reasons for termination, these reasons must be given in writing.

In cases where employment contracts have been terminated for discriminatory reasons, these terminations have been declared null and void and indemnities followed.

IV. Non-competition clause

The law sets out that a non-competition clause must be entered into with an employee who has reached his majority and the clause must be agreed upon in writing with the employee directly.

If the employer has to pay compensation to the employee because of the way in which the employment contract has been terminated, the employer will not be entitled to derive any rights from the non-competition clause agreed upon by the parties. Compensation is payable when the employer does not observe the prescribed notice period for terminating the employment contract or where the employer's voluntary decision or negligence has given the employee urgent reason for the employment contract to be terminated with immediate effect.

On the other hand an employee, who by virtue of the non-competition clause is impeded to a considerable degree from being employed other than by his employer can ask the court to order the employer to pay him compensation for the duration of the clause. The non-competition clause remains in full force, but the employee's financial demands are met.

Such compensation for the employee is determined in accordance with standards of reasonableness and fairness. In many cases the Sub district Court formula was applied.

Such compensation cannot exist if the employee was obliged to pay compensation to the employer because of the way in which he terminated the employment contract. This is the case if the employee did not observe the prescribed notice period applying to the termination of the employment contract or the employee gave the employer cause to dismiss him or her instantly.

For further information, please contact Jos Pothof [email protected] or on +31 30 21 21 111

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