Background

Dutch courts use the following formula for the calculation of severance: A x B x C. This formula is referred to as the ‘Cantonal Court Formula’.

New legislation

The Formula described above has been amended as of 1 January 2009. The change primarily relates to the A-factor, which represents the accrued years of service adjusted for age.

Factor A

Until 31 December 2008, years of service accrued in the below age brackets were multiplied by the following factor:

< 40: 1.0

41-50: 1.5

> 50: 2.0

Under the new Formula, years of service accrued in the below age brackets will be multiplied by the following factor:

<35: 0.5

35-44: 1.0

45-54: 1.5

> 54: 2.0

Factor B

The B-factor in the Formula was (and will remain) the sum of the following elements (all on a monthly basis):

• base salary;
• statutory or contractual holiday allowance;
• other fixed financial elements;
• average variable pay received over the preceding 3 (or 5) years.

Some courts in certain circumstances also included employer’s monthly pension contributions. However, under the new Formula, the B-factor explicitly excludes employer’s monthly contributions to a pension scheme, health insurance, expense allowances and the financial value of a company car (except for in very limited circumstances).

Factor C

The C-factor was (and will remain) a multiplier to be set at the discretion of the court, depending on the extent to which the grounds for termination of employment are attributable to one party or the other. In theory, the C-factor may range from zero to an indefinite number. In reality, in clear-cut redundancy cases (disappearance of position and no options for redeployment) the C-factor will usually be 1. In other situations (underperformance, clash of characters, etc.) the C-factor usually ranges from 0.5 to 2.0. In cases of relatively brief periods of employment, i.e. less than 3 years, courts have tended to set the C-factor substantially higher than they would do under identical circumstances if the employment lasted longer than 3 years.

Under the new Formula, some minor changes are anticipated to the manner in which the C-factor will be set. In cases of relatively brief periods of employment, courts will now in principle no longer deviate from the ‘normal’ system of determining the C-factor (except for in very limited circumstances). Under the new guidelines, when determining the C-factor, the courts will also consider aspects of ‘employability’, the extent of activities initiated by the company to increase an employee’s employability and the financial position of the company.

Effect on employers

These changes will impact the amount of severance to be awarded to an employee upon termination, and employers should be aware, in particular, of the changed impact of:

• the age of the employee;
• relatively brief periods of employment;
• aspects of ‘employability’ and an employer’s efforts to increase them; and
• the financial position of the company.