5 things to know about employer settlement agreements
Often, when an employer wants to dismiss an employee, the former will offer the employee a settlement agreement. In this article, Irene Lansen from ScheerSanders Advocaten explains the settlement process in the Netherlands.
Under Dutch law, employees are very much protected from being dismissed when they have entered into a permanent employment contract. In principle, employers can only dismiss an employee on the basis of certain grounds, such as performance issues, a bad relationship, etc.
Depending on the specific ground for dismissal, an employer must obtain permission for dismissal from either the court or the Dutch Employee Insurance Agency (UWV). However, an employer may also offer the employee a settlement agreement. If the employee agrees to such a settlement, permission from the court or UWV is not required.
So, what are the main things to consider before signing a settlement agreement? Read on to find out.
1. Get legal advice!
It is important for employees to obtain solid legal advice before signing a settlement agreement. A lawyer can review the settlement agreement and also assist with negotiating a better deal. Normally, an employer will offer to pay for (part of) the legal fees for instructing a lawyer. This is because it is also in the employer’s interest that the employee agrees to the terms of the settlement agreement.
2. Settlement payment
In case of termination of employment, an employee is entitled to a so-called transition payment. This transition payment amounts to a third of a month’s salary per year worked. However, an employee will often be able to negotiate a better deal, as the employer will be keen to avoid time-consuming and costly court or UWV proceedings. Some years ago, it was common under Dutch law to award one month's salary per year of service. Often, this award is still used as a starting point in negotiations.
Many expats in the Netherlands qualify for the 30% ruling. This entitles employees to a tax-free allowance of 30% of their salary to cover additional costs for working away from their country of origin. However, a settlement payment is not covered by this 30% ruling. Instead, the normal tax rate is applied.
3. Notice period
In the settlement agreement, both the employer and the employee should take into account the employer’s notice period. The applicable notice period is usually included in the employment agreement. If there is no reference to any notice period or the employment agreement refers to the statutory notice period, the amount of notice depends on the length of service of the employee.
For up to five years of service, the notice period is one month. For every additional five years of service another month of notice is applied, up to a maximum of four months’ notice in case of 15 years of service or longer. Notice should be given at the end of the month, unless another date has been agreed in the employment agreement. This means that if the parties enter into a settlement agreement on March 15 and a notice period of one month applies, the termination date is thus May 1.
The employer and the employee may also elect an earlier termination date. In such a case, the employee should ensure that the employer still compensates the employee for their salary during the notice period. This can be done by increasing the settlement payment with a lump sum equivalent to this salary. This is important in case the employee would like to apply for unemployment benefits, or a so-called WW-uitkering in Dutch. Those benefits will only be paid after the applicable notice period has expired.
4. Garden leave
In addition, it is common for employers and employees to agree that the latter will be exempt from work, once the parties have entered into the settlement agreement and the employee has handed over their work. This prevents the employer from having an employee at work who is no longer motivated to perform, whilst the employee has the opportunity to look for another role elsewhere.
In return, although employees are entitled to be paid out their remaining holidays after termination of employment, parties often agree that any leave will be deemed to have been taken during garden leave.
However, garden leave may have an impact on the employee’s eligibility for the 30% ruling. If the garden leave takes more than a month, following the month in which the employee has agreed to the settlement agreement, an employer may no longer apply the 30% ruling to any salary payment. Also, the employee should find another role within three months after going on garden leave in order to remain eligible for the 30% ruling.
5. Non-competition clause
Finally, the settlement agreement may include a clause that the agreed upon non-competition clause will be waived after the termination of employment. Whether or not this is acceptable for the employer depends on the nature of the employer’s business and the employee’s role. Waiving the non-competition clause is of course in the interest of the employee, as this usually increases their chances of finding another job.
Typically, when employers agree to waive a non-competition clause, any confidentiality obligations will remain applicable. This means that, if the employee joins a competitor, they are not allowed to disclose any confidential information obtained from the employer.
If you have been offered a settlement agreement by your employer and you would like to obtain legal advice, please feel free to contact Irene Lansen from ScheerSanders Advocaten to assist you via [email protected] or +31 70 365 9933.