Act compensating employers for transition payment for employees with a long-term illness adopted in July 2018 by both the Senate and the House of Representatives

After a long period of uncertainty, this scheme is now to be introduced. An employer who dismisses an employee suffering a long-term illness and pays the transition payment can apply to the employee insurance agency UWV for compensation for the transition payment paid. The scheme applies retroactively to 1 July 2015.

In basic terms, this is what it entails:

• compensation is available to any employer who pays the transition payment due to dismissing an employee who has a long-term illness, irrespective of the size of the company;
• the compensation payable is based on the transition payment that would be payable shortly after the second year of illness (leaving the employment contract in place for longer does not increase the compensation payable);
• the compensation also applies to other provisions made in lieu of the transition payment, by agreement with the employee, and the associated costs;
• the act enters into force on 1 April 2020, with retroactive effect to 1 July 2015;
• compensation can be applied for up to six months after paying the transition payment to the employee;
• For ‘old cases’ (transition payments paid in the period from 1 July 2015 to 1 April 2020), the application must be made between 1 April 2020 and 30 September 2020;
• UWV will implement the compensation scheme;
• (this blog post was written on 28 August 2018, so it deals with the published act as it stood at that time).

Background

The statutory transition payment was introduced in July 2015. Employers must pay this payment when they terminate an employee’s contract (provided no serious blame can be attached to the employee). The transition payment is payable, for instance, when an employee is made redundant as a result of restructuring, or when an employee has to quit because of a breakdown in the working relationship.

Inasmuch, the transition payment is severance pay. As the word ‘transition’ implies, the payment is designed to see the employee through the period until they find a new source of income. The statutory transition payment replaced the payment based on the ‘kantonrechtersformule’ (subdistrict court formula), which lacked any basis in law and was perceived as an excessive burden by employers.

Criticism

The transition payment has come under fire for its implications in the case of employees with a long-term illness. In contrast to the situation prior to 1 July 2015, the mandatory, statutory transition payment also applies when an employee is dismissed after two years of illness, the government’s reasoning being that employees with a long-term illness also need the helping hand of a transition payment when seeking new work, or to at least partly offset a drop in income in the longer term.

Many employers feel that is too high a price to pay when an employee is dismissed after long-term illness, partly because, under the Dutch system, the payroll costs and reintegration costs during illness are borne by the employer for the first two years. Consequently, employers frequently find themselves shouldering heavy costs in connection with an employee’s long-term illness.

Dormant employment contract

To get around this, after 1 July 2015 many employers opted to keep the employment contract ‘dormant’: after two years of illness, the obligation to continue paying an employee ceased, and the employer no longer incurred any costs in connection with the employment contract. If the employer does not then apply to the UWV for a permit to dismiss the employee, and does not terminate the contract or reach any such agreement with the employee, the employment contract does not end, and the transition payment is not payable.

Some employees have unsuccessfully taken the matter to the subdistrict court, claiming that employers should not be allowed to do this and asking the court to order them to pay the transition payment. Only if ‘serious blame’ can be attached to the employer for terminating a contract after two years of illness could an employee independently obtain a court order on the employer to pay the payment, but subdistrict courts are extremely reluctant, and highly unlikely, to do this.

Compensation

After introducing the transition payment in 2015, the legislator deemed the practice of dormant employment contracts to be undesirable. A solution was soon mooted in the form of a compensation scheme, whereby the UWV would compensate employers for the transition payment from the general unemployment fund. However, politicians dug their heels in for nigh on three years, leaving a question mark hanging over the scheme. That compensation scheme has now finally been adopted and is capped at (and calculated on the basis of) the transition payment that an employer must pay after two years of illness. This means the transition payment claim cannot be increased by leaving the employment contract in place for more than two years; any such increase must be borne by the employer.

Introduction and retroactive effect

When asked when it expects to be able to implement the new act, the UWV indicated that it intends to have everything in place by 1 April 2020. Therefore, the formal entry into force of the act has been anticipated for 1 April 2020.

Employers who have paid the transition payment after two years of illness prior to the act’s formal entry into force, because they terminated an employment contract due to long-term illness (either after obtaining a dismissal permit from the UWV or by concluding a settlement agreement on the basis of long-term illness) can apply to be compensated with retroactive effect. As it currently stands, the draft implementation decree limits the time frame for doing this: the application can be made from 1 April 2020, but must be submitted no later than 30 September 2020.

What are my options now as an employer?

Any employers who have paid this payment to an employee with a long-term illness need to set aside time to apply for the compensation in 2020 (before 1 October of that year).

If you are currently considering terminating an ill employee’s contract due to long-term illness and can afford to pay a transition payment, it is advisable not to delay, otherwise you may find yourself embroiled in arguments about paying a higher transitional payment because the employment contract has continued well beyond two years of illness. We urge you to get a thorough legal review of each case before making a decision, even if that decision is to NOT terminate a contract. It is important to have the risks assessed in each specific situation.

Please get in touch with us if you would like more information, or if we can be of assistance with terminating the employment contract of an employee with a long-term illness.