Draft a legally sound settlement agreement under Dutch law. The tool covers the termination of an employment contract by mutual consent (Article 7:900 and Article 7:670b of the Dutch Civil Code), with the mandatory fourteen-day reflection period, the WW-safe recitals, the transition payment calculation and a full and final release.
Your settlement agreement
What is a settlement agreement?
A vaststellingsovereenkomst (settlement agreement) is an agreement by which the parties end an uncertainty or a dispute by bindingly recording what applies between them. Its basis is set out in Article 7:900 of the Dutch Civil Code. In employment law, the employer and employee use the settlement agreement to terminate the employment contract by mutual consent. The arrangements in the agreement take precedence over default statutory rules that the parties are free to deviate from, except where the law expressly limits that freedom.
The settlement agreement exists alongside two other ways of terminating an employment contract. The first is notice of termination, for which the employer needs a dismissal permit from the UWV or a dissolution by the cantonal court. The second is dissolution by the cantonal court on one of the statutory grounds for dismissal. The settlement agreement requires no permission from any authority and no procedure. The parties arrange the termination themselves, tailored to their situation, and jointly determine the termination date, the payment and the other conditions.
In practice, the vast majority of terminations in the Netherlands proceed via a settlement agreement. The route is faster, cheaper and more predictable than proceedings before the cantonal court. Moreover, with correct wording, the employee retains the right to unemployment (WW) benefits. For that reason, the settlement agreement is preferred over judicial dissolution once both parties are willing to terminate.
Why do parties choose a settlement agreement?
For the employer, the settlement agreement removes the uncertainty of a dissolution procedure. The cantonal court applies strict scrutiny to the grounds for dismissal under Article 7:669 of the Dutch Civil Code. An insufficiently substantiated file leads to rejection of the request or to a high fair compensation award. With a settlement agreement, the employer buys off that uncertainty for a known amount agreed in advance.
For the employee, the settlement agreement creates room to negotiate. The employee can negotiate a higher payment than the statutory transition payment, request the release of a non-competition clause, agree an outplacement budget, or have a favourable reference arrangement included. That room is largely absent in court proceedings, where the judge determines the outcome.
For both parties, a correctly drafted settlement agreement in principle leaves the employee’s right to unemployment (WW) benefits unaffected. That makes the employee more willing to agree and keeps the amount the employer must offer manageable. The settlement agreement is therefore, in most cases, the solution with the lowest overall risk.
How is a settlement agreement WW-safe?
When assessing a WW application, the UWV determines whether the employee became unemployed through their own fault. The test is set out in Section 24(2) of the Unemployment Insurance Act (WW). Fault exists if the unemployment is based on an urgent cause attributable to the employee, or if the employee terminated the employment contract themselves without it being unreasonable to expect continuation. The settlement agreement must therefore demonstrate that neither situation applies.
Practice uses a fixed formulation with four elements for this purpose. The first element is that the initiative to terminate lies with the employer. The second element is that there is no urgent cause within the meaning of Article 7:678 of the Dutch Civil Code underlying the termination. The third element is that the employee is not at fault for the termination. The fourth element is that the notice period applicable to the employer has been observed in determining the termination date.
Errors in the recitals trigger a fault assessment. Wording that qualifies the employee as underperforming, or that speaks of a breakdown in trust, gives the UWV reason to investigate the grounds. A good set of recitals therefore avoids any qualification of fault. The tool uses a neutral formulation for each scenario that contains the four elements and avoids wording the UWV could read as indicating fault. Also relevant to the connection with WW benefits are Section 24(2)(a) and (b) of the Unemployment Insurance Act, since the scenario at the employee’s own request can fall under sub b.
What is the reflection period and how does it work?
Article 7:670b(2) of the Dutch Civil Code gives the employee a reflection period. The employee may dissolve the settlement agreement within fourteen days of it being concluded, without stating reasons. The dissolution must be in writing and must reach the employer within that period. The employee does not need to give a reason and does not need to pay compensation. The right is a matter of mandatory law and cannot be excluded.
The term becomes three weeks instead of fourteen days if the employer does not inform the employee of this right in writing within two working days of the agreement being concluded. In practice, the employer fulfils that duty by including the reflection-period clause in the agreement itself. The tool therefore always includes that clause and offers no option to omit it.
A second reflection period within six months is excluded. Article 7:670b(4) of the Dutch Civil Code provides that the employee has no new right to a reflection period if they conclude another settlement agreement within six months of an earlier dissolution. The tool asks a screening question about this and adjusts the text if the employee has previously dissolved an agreement.
A few practical questions arise repeatedly. Signing and dissolving by email are permitted, provided the moment of conclusion can be reliably established. For the reflection period, the moment the dissolution notice reaches the employer counts, not the moment it is sent. An employee who is on holiday remains bound by the term, since the law provides no extension. Anyone in doubt should dissolve well within the term, as a precaution, and confirm receipt.
How does the transition payment work in a settlement agreement?
The transition payment under Article 7:673 of the Dutch Civil Code is statutorily due upon notice of termination or dissolution at the employer’s initiative. That statutory obligation does not exist for a termination by mutual consent via a settlement agreement. Nevertheless, the transition payment is included in almost every settlement agreement. Without it, the employee has little reason to agree, and including it supports WW safety. The transition payment thus functions as a minimum floor.
The calculation follows a fixed formula. The employee accrues a third of a month’s salary per full year of service, plus a pro rata amount for the remaining months and days. The monthly salary is broader than the gross base salary. It includes holiday allowance, any thirteenth month, fixed bonuses, shift allowances, the twelve-month average of overtime, and the taxable value of a company car. The tool calculates this using the same engine as the institute’s transition payment calculator.
Three situations require attention. An employee who reaches the state pension (AOW) age within six months of the termination date loses the right to a transition payment under Article 7:673(7)(b) of the Dutch Civil Code. For long service, the payment runs high, which creates room to negotiate an additional amount. With high structural bonuses, the wage base can turn out considerably higher than the bare salary, which employers regularly overlook.
What are additional payments and the cantonal court formula?
Besides the transition payment, the parties often agree an additional termination payment. There is no statutory obligation to do so. The amount is the result of negotiation and depends on the employee’s negotiating position, the length of service and the employee’s age.
The cantonal court formula (kantonrechtersformule) still plays a role as a reference framework. The formula was the standard for dissolution payments until 2015. Since the introduction of the Work and Security Act, the cantonal court no longer applies it in dissolution requests. In negotiations over a settlement agreement, however, parties still use it to calibrate an additional payment.
The formula multiplies the number of weighted years of service by the monthly salary and by a correction factor. The weighted years of service take the employee’s age into account. The correction factor, the C-factor, expresses to whom the termination is attributable. The A-factor stands for the weighted years of service and the B-factor for the monthly salary. A neutral termination carries a C-factor of around one. The more the termination is attributable to the employer, the higher the factor can turn out to be in negotiations.
What happens to the non-competition clause in a settlement agreement?
A non-competition clause in principle remains fully in force after a settlement agreement. Termination by mutual consent does not automatically lift the clause. An employee who wants to be free of the clause must negotiate its release or limitation as part of the negotiations.
For the employer, release is in many cases costless. If the employee moves to a non-competing role, the employer has no interest in maintaining the clause. It is therefore sensible for the employee to request release as a matter of course. In the case of partial release, the employer will pay attention to the duration, the geographic scope and the description of the prohibited activities, so that the remaining clause is still enforceable.
The statutory framework is changing. The Modernisation of Non-Competition Clauses Bill imposes stricter requirements for a valid clause. The bill requires a written justification, a geographic delimitation, a maximum duration of twelve months and possibly compensation for the period the clause applies. Anyone using the tool should check whether this bill has entered into force in the meantime and adjust the duration and justification accordingly.
How do garden leave and holiday days work?
The parties choose from three options. The employee continues to work until the termination date, or the employee is released from work as of the date of the agreement, or the employee is released from work as of a later, specific date. With release from work with retention of salary and benefits, the employment relationship formally continues until the termination date.
The offsetting of holiday days deserves an explicit agreement. The parties record whether the remaining holiday days are deemed to have been taken during garden leave, or whether they are paid out at the end of the employment relationship. Absent an agreement, Article 7:641 of the Dutch Civil Code applies and the days not taken are paid out at the wage applicable at the time of payment.
Whether the employee may already work elsewhere during garden leave depends on the agreement. The employment relationship continues, so a secondary-activities clause can still apply. Since 1 August 2022, an employer may only invoke such a clause on an objective justifying ground under Article 7:653a of the Dutch Civil Code. In practice, it is often agreed that the employee is free to take up other employment, provided it is not with a competitor, and whether or not secondary income is offset.
Which special situations require extra attention?
The first and most important pitfall is termination during illness. The prohibition on giving notice under Article 7:670(1) of the Dutch Civil Code does not apply to a settlement agreement, so the parties can formally have a sick employee sign. The employee then, however, in principle loses the right to Sickness Benefits Act (Ziektewet) benefits, because the UWV can classify the unemployment as a disadvantaging act under Section 24(5) of the Unemployment Insurance Act. The strong recommendation is to postpone the settlement agreement until after recovery. If that is impossible, urgent legal advice is needed, and a condition precedent of a fit-for-work declaration may offer a solution.
The second situation is the statutory director. For a director of an NV or BV, the employment contract is linked to the corporate-law office. That office ends only through a valid resolution of the general meeting of shareholders or the supervisory board. A settlement agreement with a director therefore only works in combination with a separate dismissal resolution of the competent body. Assistance from a lawyer experienced in corporate-law dismissal procedures is strongly recommended.
The third situation is the state pension (AOW) age. If the employee reaches the AOW age within six months of the termination date, the right to a transition payment lapses under Article 7:673(7)(b) of the Dutch Civil Code. The tool displays a warning and does not automatically adjust the calculation, so that the user decides for themselves.
The fourth situation is a fixed-term contract without an interim termination clause. If such a clause is absent, the fictitious notice period runs until the end date of the contract. The WW start date can therefore be postponed significantly, which the employee should factor into the negotiation.
Which mistakes are often made in a settlement agreement?
The first mistake is a missing or incorrectly worded reflection-period clause, which unnoticed extends the term to three weeks. The second mistake is overlooking the fictitious notice period, causing the UWV to suspend WW benefits. The third mistake is an incorrectly calculated transition payment, usually due to forgetting holiday allowance or bonuses in the wage base.
The fourth mistake is a non-competition clause that is left undiscussed, so the employee remains unintentionally bound. The fifth mistake is the absence of an offer letter, even though it specifically supports WW safety. The sixth mistake is a final settlement that is not arranged in the agreement, leading to later disputes over outstanding entitlements.
The seventh mistake is an overly broad full and final release, which appears to also cover pension rights and later occupational illnesses. The eighth mistake is applying the scenario at the employee’s own request without pointing out the WW risk to the employee. The tool warns of each of these eight mistakes and prevents most of them by including the correct standard wording.
Which case law is relevant?
The Dutch Supreme Court has ruled on the settlement agreement on several occasions. In Supreme Court 7 October 2022, ECLI:NL:HR:2022:1374, the case concerned the reflection period and the manner in which the employee can exercise it. The ruling confirms that the employee does not need to give a reason and that the written declaration must reach the employer within the term.
In Supreme Court 14 January 2011, ECLI:NL:HR:2011:BO3521, the interpretation of a settlement agreement was central. The Supreme Court applies the Haviltex standard: what matters is the meaning the parties could reasonably attribute to the provisions in the circumstances, having regard to each other’s reasonable expectations. In Supreme Court 5 September 2014, ECLI:NL:HR:2014:2627, the case concerned the scope of the full and final release and whether later claims fall within it.
ECLI:NL:HR:2018:484 is further relevant to the consequences of breaching the reflection-period clause. A lower-court ruling on the WW-safe wording, cited as ECLI:NL:GHARL:2021:1234, is sometimes referenced; the exact citation should be verified with the legal editorial team before relying on it.
Conclusion
The settlement agreement is, in most termination situations, the fastest and most predictable solution. It avoids the uncertainty of court proceedings, gives the parties room for a tailored arrangement, and in principle leaves the right to WW benefits unaffected, provided the recitals contain the four WW-safe elements and the notice period has been respected.
A settlement agreement is not a good solution when the employee is ill, when a statutory director is involved without a separate dismissal resolution, or when the scenario at the employee’s own request is chosen without the WW consequences having been discussed. In those cases, the risk outweighs the speed.
Always have the draft reviewed by a Dutch employment lawyer before signing. This tool drafts a legally sound basis, but cannot capture every factual nuance of a file. A brief legal review prevents mistakes that can cost the employee thousands of euros, or the right to WW benefits.
Frequently asked questions about the settlement agreement
Can I still reverse the settlement agreement after signing it?
Do I have to sign what my employer proposes?
Do I always get a transition payment in a settlement agreement?
What happens to my untaken holiday days?
Do I keep my right to WW benefits after signing the settlement agreement?
What happens to my non-competition clause after signing?
Can I already start working elsewhere during a garden-leave period?
Does illness count towards the reflection period?
What if I am a statutory director?
Can I sign by email, or do I need to sign physically?
Important: this tool is not legal advice
The settlement agreement generator drafts an agreement that complies with the general statutory requirements of Dutch employment law, including the WW-safe recitals and the mandatory reflection period. The tool cannot capture every factual nuance of your situation, particularly around restrictive covenants, pension arrangements and international elements. If you are unsure about the correct scenario, the transition payment, or any clause, we recommend consulting a Dutch employment lawyer. We accept no liability for use of this tool.