The global economy has taken an incredible hit as a result of COVID-19. Initially, Dutch (emergency) support packages were aimed at helping as many companies as possible survive and preserving as many jobs as possible. In the meantime, the financial schemes, such as NOW 3.0, are more focused on “adapting to the current economic situation”. This means, among other things, that it can be wise for companies to scale down somewhat if they expect revenue to lag for a longer period. By far the best (and cheapest) way to part ways with surplus employees is by mutual consent, i.e. a settlement agreement. Read below what a dismissal in this way will cost if you do not have a solid dismissal file, but still want to proceed with the dismissal.

It’s not a question of whether dismissal is possible, but rather what it costs.
The new economic reality can give rise to downsizing. But it may also be that things have not been going well with certain employee(s) for a while (the spark is gone, they don’t fit the team/strategy, etc.). Sometimes dismissal can be the only way out. There is, of course, no time or money at the moment for an extensive performance improvement process. So what then? Dismissal and file-building requirements are quite strict nowadays. Partly for this reason, many employers think dismissal is not possible, and so a situation such as described above often just drags on in many cases. At the expense of the business.

Our extensive experience as employment law attorneys shows, however, that a dismissal can always be arranged via a settlement agreement, provided you have properly prepared beforehand with the right strategy and know what costs you are getting into. A dismissal budget and a good employment lawyer, with up-to-date knowledge and sharp negotiation skills, are essential for you to make decisions and go into it well prepared.

Throw “the cat among the pigeons” and start an exit conversation.
Both dismissal for economic reasons and dismissal for more personal reasons have the same starting point. As an employer, it is important to first raise the problem and the solution of an exit for discussion. Of course, as an employer, you can wait amid workplace tensions and hope that an employee will resign on their own, but this usually doesn’t happen and the situation may even end in a sick leave notification. And that is the last thing you want as an employer, because in the worst case, you would then have to keep paying the employee’s wages for another 2 years. So stay in the lead.

Incidentally, it rarely happens that no negotiations turn out to be possible (in the end) once a departure by mutual consent via a settlement agreement is raised for discussion. This is because there is hardly an employee who can withstand having to work in a workplace where there is no longer a match and where he or she no longer feels wanted. Sometimes they hold out for a while. At most, this will increase the severance payment. Once those negotiations have started, an employee’s mindset is geared towards leaving. It almost never happens that there is still a switch to halting the negotiations and restoring the employment relationship.

Litigation is a last resort and a threat, and has many disadvantages.
Litigation is, as a rule, disadvantageous for you as an employer. That is why we strive to settle as many personnel files as possible before a court case is or has to be initiated. In 2019/2020, we managed to settle all reported personnel files in which dismissal was necessary. We succeeded 100% in preventing all threatened lawsuits.

Disadvantages of an employment law procedure.
A procedure has many disadvantages. Firstly, you always bear the litigation risk that the judge will not decide in your favour and will reject the dissolution or reverse a summary dismissal. Your negotiating position to still make a deal with the employee afterwards about a departure is thereby weakened enormously. You then pay both a significantly higher severance payment and the full litigation costs. Via a termination by mutual consent (settlement agreement), you do not have these cost-increasing effects, and you know in advance for certain that the employment relationship will end on a specific date.

A second disadvantage of a procedure is that if the judge dissolves the employment contract, you end the employment relationship without full and final discharge. There are then still quite a few loose ends. Examples I would mention: the return of company property, the settlement of accrued holiday pay, study costs that must be repaid, a non-compete and non-solicitation clause that still needs to be made concrete, agreements about communication to colleagues, a lease car that must be taken over, etc. The subdistrict court judge dissolves the contract, but arranges nothing further. Some matters can in themselves be agreed at the hearing if a deal is struck “in the corridor”. However, that then has to happen under great pressure and time constraints, and sometimes something that should have been arranged is not. That then causes an unpleasant aftermath. In a settlement agreement, you can settle all those topics at once in your favour, and also take sufficient time for it. No aftermath and loose ends anymore.

Thirdly, the legal costs you incur because you were unwilling to compromise in the negotiations on certain (financial) points, such as a higher severance payment, payout of holiday days, etc., usually do not outweigh the additional costs of that less favourable settlement. Even if you win, you are on average only reimbursed for 25% of your litigation costs. This only applies if the judge decides in your favour and rules that the employee must reimburse (part of) your litigation costs. Very often, the judge rules that each party bears its own costs, even when the ruling is in favour of the employer.

Incidentally, it is indeed the case that in many procedures, after some pointers from the subdistrict court judge, a settlement is still reached by means of a settlement agreement. The only issue is that the judge has then become involved, and that usually does not work in your favour. Your negotiating position weakens considerably regarding certain points in a settlement agreement.

A procedure, in short, causes a lot of uncertainty and always comes with additional litigation costs that are not recouped.

What may a dismissal by mutual consent cost you as an employer?
The budget you need to take into account for a dismissal by mutual consent can consist of the following elements:

1. Costs of guidance from an employment lawyer;
2. Costs of filing a pro forma petition with the UWV or the subdistrict court;
3. Severance payment (including outplacement allowance);
4. Legal expense reimbursement for the employee;
5. Continued pay until the end of employment during release from work duties;
6. Employment settlement costs.

Re 1. Guidance (costs) from an employment lawyer.
This cost item is often a black box, but it doesn’t have to be. Most employment law attorneys work on an hourly rate basis, certainly in contested cases, but can often give an estimate of the costs. This cannot be very precise, because they don’t have a crystal ball and don’t know in advance how labour-intensive it will be to get the settlement agreement signed. One employee is very stubborn and keeps inventing obstacles, while another is easy-going and willing to sign the very first settlement agreement you present. Take into account a budget of between €1,500 and €5,000 excl. VAT. In exceptional cases, it can be considerably more expensive, for example if a sick-leave and mediation process also runs through it, on which advice must be given or in which participation is required.

Re 2. Severance payment.
This payment often comes about through the calculation of the minimum statutory transition payment and the fair compensation, or 1.5 times the transition payment (if you use the i-ground) as ceilings for the negotiations. The transition payment is the starting point in a dismissal and constitutes the minimum amount the employee is entitled to receive upon termination of employment. Roughly speaking, this transition payment, since the introduction of the WAB (1 January 2020), amounts to 1/3 of a month’s salary per year of service. Via, among other things, the Dutch government’s calculation tool you can see how large the transition payment is to which your employee is entitled. The payment is a maximum of €83,000 gross. Or, if the annual salary is higher than €83,000, a maximum of 1 gross annual salary.

There are options for an employer to deduct costs incurred (investments in the employee concerned) from this transition payment. This applies to costs that have increased the employee’s employability outside the employer’s own organisation, but in certain cases (since 1 July 2020) also for investments in activities that have promoted the employee’s employability within the employer’s own organisation.

These costs, however, rarely play a role in the negotiation process, because such outplacement measures are not often desired or offered. Employees would rather have a higher payment to cushion their loss of income due to unemployment.

Re 3. Legal expense reimbursement for the employee.
We always advise the employer to make a fixed legal expense reimbursement available to the employee. This prevents the employee from making use of the statutory two-week cooling-off period to withdraw from the settlement agreement. Signing of the settlement agreement is sped up rather than delayed if a lawyer is involved on the employee’s side. That lawyer can, after all, reassure the employee that signing will not cost them their unemployment benefit rights. Employees are usually very afraid of that. Moreover, a lawyer negotiates not with emotions but with reason. A deal is then reached much more quickly.

The standard budget that the employer generally makes available to the employee to have the settlement agreement reviewed varies between €750 and €1,250 excl. VAT. In an exceptional case, that reimbursement can be higher. It also happens that a reimbursement of €5,000 is paid. That is a bargaining chip to close a deal and can be very important in getting an employee over the line. Sometimes something is then deducted from the severance payment. Some employees are not insured and have to pay all legal costs out of their own pocket, and in doing so they cannot reclaim VAT. It can then be more tax-efficient if the reimbursement paid by the employer is increased and the employee then receives a somewhat lower gross severance payment. Note, however, that there are tax pitfalls here, and this must always be carefully reviewed by a tax specialist on a case-by-case basis.

Re 4. Continued pay until the end of employment.
Sometimes an employee insists on remaining employed for a few more months, because he/she wants to apply for jobs from an employed position. An employee can also needlessly drag out the negotiation process by reporting “sick”. But the longer the negotiations continue, the further the originally desired termination date shifts as well. The consequence of this is that the employer is then the one who loses out. It then “costs” the employer another month’s wages. Furthermore, parties often agree in the settlement agreement that the employee, after signing and before the (notional) notice period has expired, is released from work duties. Parties in that case really no longer want to keep working together, and the employee can then focus 100% on job hunting.

Wage costs without work can therefore be experienced as an extra cost. By that we mean specifically the wages that must continue to be paid during the notice period agreed in the settlement agreement. That will be a minimum of 1 month and a maximum of 4 months, depending on the length of employment. We always factor this in as a point of negotiation, with which we can sometimes lower the severance payment.

Re 5. Employment settlement costs.
These are additional costs on the employer’s side when the employment ends. Think, for example, of the case where your employee has a lease car and does not have to return it at the end of the employment. The early termination of the lease contract often brings extra costs with it.

Example with calculation:
A company wanted to conclude a settlement agreement with a 50-year-old IT employee. The employee had been employed for 9 years. He was most recently paid a gross salary of €4,249.

The (minimum) transition payment came to €12,751 gross.

The cause of the exit was a disturbed working relationship between the IT employee and his manager. The case was very labour-intensive, because the employee had reported sick. Both the employer and the employee requested a second opinion in this regard. Mediation also had to be applied twice. The employee’s lawyer also communicated very sharply and intensively in this case, which was much more labour-intensive than normal.

The costs up to and including the signing of the settlement agreement for the employer came to the following;

Outcome of the employer’s cost breakdown;

N.B. Every budget is different because every case is different! It is not a question of whether it can be done, but whether you have the budget to bring about the dismissal of an employee.

Would you like to always stay informed of relevant legal developments in the field of employment law, contract law, company law and privacy law for SMEs? Then sign up for our monthly Legal Alert newsletter and follow our company page on LinkedIn.

Questions or advice?
The corporate legal advisers at The Legal Company specialise in employment law. If, in light of the above, you have any questions or would like legal advice, please contact us by emailing info@thelegalcompany.nl, or by calling 020-3450152., or fill in our contact form.

Nothing changes as often as laws and regulations. We would like to point out that our blogs may no longer be in line with current laws and regulations and may therefore be outdated. If you have questions or a problem relating to this blog, or if you require legal assistance, please contact us.