Compensation in a Dutch settlement agreement
When an employer and employee agree to end employment through a settlement agreement (vaststellingsovereenkomst, VSO), one of the central issues is the financial compensation the employee receives. The starting point under Dutch law is the statutory transition payment (transitievergoeding) under Article 7:673 of the Dutch Civil Code: the employee is entitled to at least this amount upon termination initiated by the employer, regardless of how the termination is formalised. In a VSO, the employer and employee may agree on a higher amount.
The transition payment is calculated at one-third of the monthly salary (bruto maandsalaris) for each full year of employment. For periods shorter than a full year, the payment is calculated pro-rata. The monthly salary for this purpose includes not only the base salary but also fixed emoluments such as fixed bonuses, fixed allowances, and the holiday allowance. Since 1 January 2020, there is no maximum number of years: the transition payment accrues from the first day of employment and grows indefinitely.
Fair compensation and enhanced severance under Dutch law
In addition to the transition payment, an employee may be entitled to fair compensation (billijke vergoeding) under Article 7:681 of the Dutch Civil Code if the employer acted seriously culpably (ernstig verwijtbaar) in causing the termination. In a VSO context, the prospect of the employer being ordered to pay fair compensation in court proceedings gives the employee leverage to negotiate additional compensation above the transition payment. Many VSOs include a fixed compensation amount that subsumes both the transition payment and any additional severance, without itemising them separately.
What is a reasonable settlement amount under Dutch law?
There is no statutory formula for the 'right' settlement amount above the transition payment. Factors that influence the negotiation include: the strength of the employer's dismissal case, the employee's age and prospects of finding new employment, the length of service, the applicable CAO severance entitlements, and the costs and risks of litigation. An employment lawyer can benchmark the offered amount against what would likely be awarded in court proceedings and advise on whether to accept, negotiate, or litigate.
The transition payment is calculated at one-third of the monthly salary for each completed calendar year of service and proportionally for any remaining period, with a statutory maximum of EUR 98,000 gross (indexed annually) or one annual salary if that is higher (Article 7:673(2)(3) BW). The monthly salary for this calculation includes the base salary, holiday allowance, and fixed emoluments such as fixed bonuses and fixed allowances, as specified in the Transition Payment Decree. In addition to the transition payment, an employee who was dismissed in a seriously culpable way can claim fair compensation (billijke vergoeding) under Article 7:681 of the Dutch Civil Code; this amount is not formulaic and is assessed by the court based on all circumstances, including loss of income, career prospects, and the gravity of the employer conduct.
The transition payment is calculated at one-third of the monthly salary for each completed calendar year of service and proportionally for any remaining period, with a statutory maximum of EUR 98,000 gross (indexed annually) or one annual salary if that is higher (Article 7:673(2)(3) BW). The monthly salary for this calculation includes the base salary, holiday allowance, and fixed emoluments such as fixed bonuses and fixed allowances, as specified in the Transition Payment Decree. In addition to the transition payment, an employee who was dismissed in a seriously culpable way can claim fair compensation (billijke vergoeding) under Article 7:681 of the Dutch Civil Code; this amount is not formulaic and is assessed by the court based on all circumstances, including loss of income, career prospects, and the gravity of the employer conduct.