By Joost Verlaan, Firm: Advocaten

The Netherlands Supreme Court has answered a question referred to it on dormant employment and on what terms dormant employment contracts can be terminated.

What does a dormant employment relationship entail? If an employee is permanently unfit for work (for a period longer than 104 weeks), the employer's continued salary payment obligation and the prohibition on termination during illness will lapse. If, subsequently, the employer does not terminate the employment contract, the situation arises in which the employee no longer performs work and the employer no longer pays wages, but the employment contract continues as ‘dormant’. The employer usually does this to avoid having to pay the statutory ‘transition payment’ (the statutory payment on severance in the Netherlands).

The Supreme Court has now held, on a question referred to it for preliminary ruling, that if an employee whose employment is dormant in this way requests the employer to terminate his or employment with payment of the transition allowance, based on good employment practices, the employer is in principle obliged to comply with this request. The situation may be different if the employer had justified interests in keeping the unfit employee in its employ, for example if there is a realistic prospect of reintegration.

The judgment by the Supreme Court has everything to do with the Transition Compensation Act, which comes into effect from 1 April 2020 (see here for more details). This law provides that employers are compensated by the Employee Insurance Agency (UWV) for payment of the transition allowance after 104 weeks of illness. As a result, the argument that an employer is forced into incurring considerable additional costs as a result of having to pay the transition payment is no longer valid. Moreover, it is clear, according to the Supreme Court that the legislator wants to get rid of ‘dormant employment contracts’.

However, according to the Supreme Court, the maximum compensation to be paid can be limited to the amount that the employer would have owed in transition compensation payment had the employment ended on the day following the conclusion of the 104-week period. The Supreme Court thus seems to state that upon termination of a dormant employment contract, an employer should not have to pay compensation higher than the amount of transition compensation it would have owed immediately after the 104-week period.

This remains an important unresolved issue. For example, if an employment contract has been kept dormant for five years, does the employer have to agree to a request for termination of that employment with payment of the full transition payment, that is to say calculated up to the actual end date? Or can the employer agree to the request and offer only a sum of money equal to the transition payment as calculated on the basis of the end date of the 104-week period? Case law on this topic will be keenly awaited to clarify this.

For employers, if and as soon as people come to you with a request for an agreement with reference to this Supreme Court ruling, it is crucial that you take swift action, starting with taking legal advice.