On 26 November 2013 the Ministry of Finance published its long expected proposal for amendment of the Dutch regulation on collected remuneration for the financial sector (the “Proposal”). With the Proposal the Ministry aims to introduce stricter rules on remuneration for employees of financial institutions, deviating from the agreed playing field at European level.
The Proposal brings the new remuneration rules in scope for virtually all financial institutions. Thus, not only for banks and insurers, but also for investment firms, financial intermediaries, clearing institutions, payment service providers and all other companies regulated pursuant to financial sector laws.
The Dutch legislation will apply for all businesses regulated in the financial sector and with corporate seat in the Netherlands. However, the law provisions also extend to the subsidiaries of Dutch parent companies, whether these subsidiaries are established in the Netherlands or anywhere else in the world. Branch operations abroad are also subject to the Dutch rules on collected remuneration. In order to enforce the rules in the widest possible sense, parent companies established in the Netherlands, even if they are not regulated (for instance through the application of the provisions on consolidated supervision), must comply with the new law provisions.
The rules on collected remuneration apply broadly to the workforce of the financial institutions concerned. The provisions are not restricted to individuals working at executive levels only or to individuals being members of the board. This means that all employees of financial institutions working in the context of the financial sector business, but also any employees working for subsidiaries in other areas not being financial sector activities are subject to the rules on collected remuneration.
One of the important anti-avoidance rules, concerns the extension of the rules to individuals working for the financial institution on the basis of other types of contractual arrangements, for instance permanently insourced individuals employed by external business outsourcing companies. This means that the scope of the remuneration rules also extends outside the group of companies working in the financial sector and being subject to the rules.
The most discussed provision of the new rules concerns the introduction of a bonus cap of 20% of fixed remuneration, rather than the agreed 100% cap for banks and investment firms in the European Directive 2013/36/EU (CRD IV). The bonus cap applies, with little possibilities for exceptions/excluding. The Proposal aims to introduce a wide range of anti-avoidance rules, in order to enforce the bonus cap as widely as possible to the businesses concerned.
Other rules applicable concern:
- The prohibition on guaranteed bonuses without these bonuses vesting based on performance criteria;
- Limitation of exit packages for executives to 1 years fixed salary;
- Prohibition to distribute exit compensation to (a) individuals terminating the employment agreement on their own initiative or (b) in case the employee’s agreement is terminated for cause of negligence in the performance of that employee or (c) if the company’s performance is failing and the leaving employee is one of the daily policy makers of the company;
- Extension of the claw back provisions implemented in Dutch law for executives and supervisory directors to all employees in scope of the new provisions on collected remuneration, whether working in the Netherlands or abroad;
- Financial institutions subject to state support measures are prohibited to distribute any variable remuneration to individuals qualifying as daily policy makers. This rule extends to the senior management group and is not restricted to members of the executive and non-executive board.
There are few exceptions to the rules. In summary, some of the exceptions are:
- The rules on collected remuneration do not apply for businesses that mainly carry out other business operations and that have one or more financial institutions comprised in the group of companies. One could think of auto dealerships that also offer certain financial products (car lease products, insurance or other ancillary financial products) and are for that part regulated as financial intermediary;
- The rules on the bonus cap do not apply to individuals working for subsidiaries established outside the European Union, provided that they apply the (100%) bonus cap rules as set forth in article 94 of CRD IV;
- Exceptions to the rules on the bonus cap may be applied to certain individuals whose remuneration is not regulated solely in collective bargaining agreements applicable to the company’s employees, if the average of the ratio between fixed and variable remuneration for all the employees working for the business in the Netherlands does not exceed the 20% bonus cap;
- For groups of companies where more than 75% of the personnel work for more than three years primarily outside the European Union (to be measured retroactively during a period of 5 years), the maximum variable remuneration rules of CRD IV apply instead of the Dutch law provision restricting the bonus to 20% of fixed remuneration;
- The bonus cap does not apply to grants of variable remuneration to individuals required as compensation for reorganization measures within the business and to support the retention of key individuals, provided the variable remuneration does not exceed the maximum variable remuneration rules of CRD IV.
Sanctions on non-compliance are not specified specifically in this legislative proposal. However, the relevant provisions on remuneration will be embedded in the Dutch Act on financial supervision. They are placed within the context of requirements for proper governance and proper conduct of financial sector businesses. The sanctions to enforce the provisions may vary from (i) administrative fines, (ii) binding directions from the supervisory authorities, (iii) binding directions supported with penalties to the worst case up to (iv) withdrawal from licenses granted. Under CRD IV the Dutch Central Bank will even obtain the right to directly dismiss (executive) directors and others determining the daily policies within the company resulting into a direct intervention in the corporate organization of the institution concerned by the supervisory authorities. When MiFID II and MiFIR will be adopted, a similar authority on direct dismissal of directors and daily policy makers by the Authority Financial Markets will be introduced too.
It is intended that the Dutch rules on collected remuneration will enter into force on 1 January 2015. This gives companies less than a year (assuming adoption of the Proposal in April 2014 in Dutch Parliament) to implement the new rules. Grants of variable compensation in conflict with the bonus cap of 20% and made prior to 1 January 2015 may be honored during the whole year 2015 as a transitory provision.
Amendment of employment conditions
The implementation of the Proposal will in most cases force financial institutions to amend their company remuneration policy and existing employment agreements before 1 January 2015. In case the variable remuneration is not awarded solely at the discretion of the company, changes thereto are likely to qualify as an amendment of employment conditions.
In general the unilateral amendment of employment terms by an employer is subject to strict rules under Dutch employment law. Firstly, it should be assessed whether the implementation of the Proposal leads to the necessity to amend the company bonus policy. Under circumstances the Works Council might have the right of consent (art. 27 Works Councils Act).
Secondly, the Proposal should be implemented in the employment agreements with the individual employees. Dutch law provides for the following possibilities:
- Amendment with mutual consent, with acceptance of the employee. In case of a reasonable offer, refusal by an employee of a proposed change to his employment agreement might be contrary to principles of good employment behavior (art. 7:611 Dutch Civil Code).
- If a unilateral changes clause is incorporated in the employment agreements, the employer should substantiate that it has considerable interests to amend the employment conditions which interests, based on reasonableness and fairness, outweigh the interests of employees that are negatively impacted by the intended change (art. 7:613 Dutch Civil Code).
- In case no unilateral changes clause is agreed upon, the company should be able to substantiate that in view of the principles of reasonableness and fairness it is unacceptable to remain the employment conditions unchanged (art. 6:248 Dutch Civil Code).
It follows from case law that the sole fact that an employer is forced to implement new legislation is not sufficient to allow a unilaterally imposed amendments to employment agreements or to force the employee to agree with the proposal. This rule applies in particular if it concerns important employment conditions such as remuneration. In this specific case it can however be argued that the interests of the company outweigh the interests of the employee, especially if the negative financial impact of reduced variable remuneration will be compensated by means of increased fixed salaries, introducing a 13th month etc. Since the company risks a significant fine or even withdrawal of the license to operate as a financial institution this would outweigh the interests of the employee. This is particularly the case if the employer seeks to compensate the consequences of the amendment to the remuneration paragraphs with other financial rewards.
It will therefore be key for employers introducing amendments to the remuneration framework to adopt the Proposal, to offer employees reasonable (temporarily) compensation for reduction of variable remuneration. We believe that it is an unintended and undesirable consequence of the Proposal, that employers will be faced with less flexible remuneration packages for employees and, therefore, significant higher costs for the work force. Ultimately, this may have consequences for the position of the Netherlands in the financial sector and employment opportunities.