On 14 October 2008, the Court of Appeal of The Hague changed its approach on damages in cases of manifestly unfair dismissal. The court ruled in seven different cases in which employees claimed damages from their former employers after the latter had terminated the employees' contracts by notice with permission from the CWI ( from 1 January 2009: the "UWV WERKbedrijf"). Contrary to its previous judgments, the court ruled that the amount of damages should be calculated on the basis of the sub-district court formula applicable to rescission proceedings under Article 7:685 of the Dutch Civil Code ("DCC"). It went on to rule that the sum payable under the formula should, however, be reduced by 30% in cases of manifestly unfair dismissal. Why did the court take this approach, and what are the implications?

Rescission v. termination by notice

Although the rescission proceedings under Article 7:685 DCC (which dates back to 1907) were originally intended for exceptional cases, they provide an equivalent alternative to the more commonly used method of termination by notice. The main difference between the two is that, in rescission proceedings, the sub-district court can immediately grant compensation, whereas in the event of termination by notice (whether on the basis of a permit from the UWV WERKbedrijf or otherwise), the employee must initiate separate proceedings for manifestly unfair dismissal under Article 7:681 DCC in order to obtain damages. Article 7:681 DCC refers to damages (in accordance with fairness), whereas Article 7:685 DCC "only" refers to fair compensation.

Developments in case law

The past few years, the lower courts have displayed a tendency to apply the sub-district court formula when determining the amount of damages in cases of manifestly unfair dismissal, even though the formula was drawn up for rescission cases. With a few exceptions[1], the courts of appeal did not follow this trend. On 14 October 2008, however, the Court of Appeal of The Hague changed its approach in no less than seven cases, and explicitly ruled in favour of applying the sub-district court formula by analogy.[2] The court explained its change of approach on the grounds that the differences between the judgments of the sub-district courts and those of the courts of appeal had led to an absence of legal uniformity. Arguing that this situation was undesirable, the court therefore decided to extend the sub-district court formula to cases of manifestly unfair dismissal.

30 % reduction

What is remarkable, however, is the decision by the abovementioned court to reduce the sum payable under the formula by 30% in cases of manifestly unfair dismissal. Furthermore, the court ruled that if the 30% reduction amounts to less than one month's salary, a reduction of one month's salary applies. In other words: the employee will receive the sum payable under the formula minus 30% (being at least one month's salary). It is unclear how this particular figure (30%) was set. The court based its decision to apply the reduction on two grounds. Firstly, it pointed out that in order to terminate an employment contract by notice, an employer must first obtain a dismissal permit from the UWV WERKbedrijf. This means going through the permit procedure and, furthermore, then being required to observe a notice period. This results in higher costs for the employer because he must continue to pay the employee's salary for longer than would have been the case with rescission proceedings. Secondly, the court argued that the legal criterion "manifestly" implies a threshold that justifies a reduction of the sum payable under the formula: the court was apparently of the opinion that dismissal is "manifestly" unfair only if the compensation given by the employer at the time of termination is less than 70% of the sum payable under the formula.

Response to the judgments

A number of questions can be raised as regards the court's arguments in support of the figure of 30%. The additional salary payable by the employer in the event of termination by notice (taking into account observance of the notice period), as opposed to rescission proceedings, will in many cases be less than 30% of the compensation payable under the sub-district court formula. Consequently, the choice of this percentage seems rather arbitrary.

Furthermore, some legal authors are of the opinion that in order for Article 7:681 DCC to be successfully invoked, it is not necessary that the dismissal be held by the court to be "manifestly" unfair. Accordingly, the underlying idea behind applying the formula in such cases should be to ensure that, in practice, rescission and termination by notice serve as equivalent alternatives. Against that background, it is therefore unreasonable – in these authors' view – to "send the employee home" with less compensation simply because the employer has decided to opt for termination by notice instead of rescission. To the above it can be added that, in the event of termination by notice, any proceedings for manifestly unfair dismissal will have to be commenced by the employee at his own initiative. In such proceedings (unlike rescission proceedings), appeals are possible right up to the Supreme Court. Compared to rescission proceedings, proceedings for manifestly unfair dismissal require substantially higher costs and more effort on the part of the employee. In the opinion of some authors, this even justifies a higher ­– rather than a lower – compensation.

Others, however, believe that the court's approach rightfully tries to bring an end to the vague standards and legal uncertainty regarding the outcome of proceedings for manifestly unfair dismissal. They also point out that, provided the circumstances of the case at hand give cause to do so, a court may correct the percentage of 70 % by raising or lowering the correction factor (the "C factor") in the formula. This gives enough scope for the appropriate amount of damages to be set.

Next steps

It is uncertain whether other courts will follow the example of the court in The Hague. Judging from a decision rendered on 16 December 2008, it appears that the Court of Appeal of Leeuwarden, at any rate, has chosen to continue as usual, as it expressly stated that it was not applying the sub-district court formula:

'Contrary to the respondent's arguments, the damages should not be determined on the basis of what is known as the sub-district court formula. As the court has repeatedly stated, this formula is not intended to provide a benchmark for determining the amount of damages in the event of a manifestly unfair dismissal.'

Employment lawyers are eagerly waiting to see how the Supreme Court – and also the other courts of appeal – will rule on this subject.