On 7 July 2009 the Courts of Appeal of Amsterdam, Den Bosch and Leeuwarden rendered judgments on the question of how the amount of damages should be calculated in cases of manifestly unfair dismissal. The three courts have, for the first time, applied a new method: the XYZ formula.

Introduction

In an earlier newsletter we informed you about a remarkable change of approach by the Court of Appeal of The Hague, which ruled on 14 October 2008 that in cases of manifestly unfair dismissal it would henceforth apply the sub-district court formula minus 30%. In a set of judgments rendered on 7 July 2009, the Courts of Appeal of Amsterdam, Leeuwarden and Den Bosch also addressed the question of the applicability of the sub-district court formula in cases of manifestly unfair dismissal[1], and have come up with a new formula: the XYZ formula.

The judgments of the three Courts of Appeal

In all the judgments, the relevant part of the court's deliberations reads as follows:

"When deciding the question of whether the consequences of termination for the employee are too grave compared to the employer's interest in termination, the court should take into consideration all the circumstances of the case at the time of dismissal in correlation to each other (inter alia Supreme Court judgment HR 15 February 2008, NJ 2008, 111). In this regard the circumstances set out below, among others, can play a role.

1. General: employment relationship and termination

  • the grounds for termination: risk environment at the risk of the employer or of the employee
  • the necessity for the employer to end the employment relationship
  • the duration of the employment relationship
  • the employee's age at the time the employment relationship is ended
  • the employee's job performance
  • the expectations generated by the employer on the part of the employee
  • the employer's financial position
  • in the event of a work conflict: attempts by the parties to find a solution in order to avoid a dismissal
  • in the event of work incapacity, the following specific circumstances:
    • the relationship between the disability and the work
    • whether any blame can be attached to the employer with regard to the disability
    • the nature, duration and extent of the disability (chances of recovery, full or otherwise)
    • the employer's conduct with regard to the disability, in particular with regard to reintegration of the employee
    • the employee's efforts towards his reintegration
    • the financial compensation offered during the period of disability (e.g. supplement to salary, length of employment relationship following the commencement of the disability)

2. Other work (suitable or otherwise)

  • the employer's and employee's efforts to find other work, suitable or otherwise, within the employer's enterprise (e.g. through retraining or supplementary training)
  • the flexibility of the employer/employee
  • the employee's chances of finding other work, suitable or otherwise (in this regard a role can be played by education, employment history, age, disability and medical limitations)
  • the employee's efforts to find work, suitable or otherwise, elsewhere (e.g. through outplacement)
  • dispensation from performance of work during the relevant period/notice period

3. Financial consequences of termination

  • the financial position in which the employee has ended up; in this regard any income pursuant to social security laws and any loss of pension rights can be of relevance

4. Arrangements made and financial compensation

  • any compensation already offered/paid
  • the existence of redundancy arrangements that have been agreed in advance on an individual basis
  • the existence of a social plan (whether drawn up unilaterally or agreed with employee organisations or a works council).

(…) If it is decided that the dismissal was manifestly unfair, the issue of damages arises. The amount of damages shall be calculated as follows.

Damages = X x Y x Z

X: Weighted number of employee's years of service

For the calculation of X, the employee's time in service shall be rounded off to full years. After that, the years in service shall be weighted as follows: years of service before the age of 40 count for 1, from the age of 40 until the age of 50 for 1.5 and from the age of 50 for 2. A period of more than six months shall be rounded off upwards.

Y: Last-earned salary

When calculating Y, the point of departure is the gross monthly salary, in any event plus fixed agreed pay components such as holiday allowances, fixed "thirteenth-month" payments, structural remuneration for overtime and fixed allowances for shift work. Unless there are very exceptional circumstances, the calculation of Y (last-earned salary) shall not include: the employer's share of pension premium payments, a company car, reimbursement of expenses, the employer's share of health insurance costs and any non-structural pay components (e.g. non-structural bonuses).

Z: Correction factor

In determining the correction factor, all the circumstances of the case at the time of dismissal shall be weighed up, inter alia the circumstances listed above. The point of departure is that Z = 0.5. In this regard the aim of the Z factor is, in principle, to determine the maximum amount of damages in the case of a manifestly unfair dismissal. Only in exceptional cases can this factor be set at higher than 0.5. The aim behind setting the Z factor at 0.5 is to stay in line with existing practice in the case law (published and unpublished) laid down by the Courts of Appeal during the past years.

Rounding off: The amount of damages shall be rounded off to a full number and stated as a gross sum.

Maximum amount: In principle, the amount of damages shall not exceed the anticipated loss of income until the age of retirement."

Commentary

It is noteworthy that the XYZ formula which the Courts of Appeal of Amsterdam, Leeuwarden and Den Bosch henceforth intend to apply is, in fact, the "old" sub-district court formula – as applied prior to 1 January 2009 – except that the C factor, now called the Z factor, is set at 0.5. As far as the outcome in terms of the actual amount of damages is concerned, there is therefore only a limited difference compared to the approach taken by the Court of Appeal of The Hague, whose point of departure is the new (and, from employees' point of view, more disadvantageous) sub-district court formula minus 30%. What is remarkable, however, is that whereas the Court of Appeal of The Hague has stated that the C factor in the sub-district court formula can be used to take into account any circumstances that are relevant for the amount of damages (meaning that C can be set at higher than 1), in the XYZ formula the setting of Z at 0.5 appears, in principle, to be a maximum. It is also noteworthy that the Courts of Appeal of Amsterdam, Leeuwarden and Den Bosch did not give any further reasons for the choice of the formula they applied; nor did they give a reason for why, in their opinion, the damages in cases of manifestly unfair dismissal should be lower than in rescission cases. The Court of Appeal of The Hague stated that the differences between rescission proceedings (quicker procedure, no notice period) and proceedings for manifestly unfair dismissal (assessment by the UWV WERKbedrijf, observation of notice period), as well as the criterion "manifestly" unfair, justify applying a reduction to the sum payable under the sub-district court formula. This reasoning on the part of the court can be challenged. For example, some legal authors are of the opinion that where the reason for termination of the employment relationship is, e.g., the relevant business's financial situation, there is no reason why the employee should be expected to accept a smaller payment depending on which method of termination has been chosen by the employer. The choice of the figure of 30% (the reduction applicable to the new formula) or 50% (the reduction applicable to the old formula) is rather arbitrary and, in many cases, will represent a far larger sum than the salary to which the employee would have been entitled during the notice period. Furthermore, 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 awarding the employee compensation that is higher – rather than lower – than the sum payable under the sub-district court formula.

Nevertheless, in terms of legal certainty it is a positive development that the courts of appeal are making an effort to bring an end to a long-running debate. However, it would have been better if they had all adopted the same line. On 7 July 2009, the day on which the Amsterdam, Den Bosch and Leeuwarden courts introduced the XYZ formula, the Court of Appeal of The Hague also rendered a judgment in a case of manifestly unfair dismissal.[2] This judgment indicates that the court in The Hague is, in any event for the time being, adhering to its own position.

Practical consequences: more rescission proceedings during notice period?

The practical effect of the recent judgments of the Courts of Appeal of Amsterdam, Leeuwarden and Den Bosch, as well as that of The Hague, is that termination by notice will become a more attractive option for employers, and that employees will have a weaker bargaining position in negotiations on a possible termination agreement in cases where the employer can choose to terminate the employment contract by notice.

Another possible consequence of the judgments is that more and more employees will initiate rescission proceedings during the notice period in an attempt to have the employment contract rescinded prior to the date on which the termination by notice will take effect, and thus be awarded compensation pursuant to the sub-district court formula. There is some discussion as to whether this is permissible. Some judges and legal authors are of the opinion that this constitutes improper use by the employee of the option of rescission. Others, however, point out that the text of Article 7:685 of the Dutch Civil Code states that each of the parties may at any time apply to the court, and argue that in the same way that the employer is entitled to choose the termination method that best suits him/it, so too does the employee have the right to choose from among the options that the law offers him/her.[3] An example of a judgment in which this position is supported is the judgment rendered by the District Court of Almelo on 30 October 2006 (JIN 2007/52). The court rendered its judgment on 30 October and rescinded the employment contract on the same day, applying a correction (C) factor of 1.25, whereas the employer had given notice of termination to take effect on 1 November

In order to pre-empt the employee, the employer could choose to terminate the contract by notice in an incorrect manner, i.e. by giving too short a notice or no notice at all. In such a case, the employee will no longer have any time to initiate rescission proceedings. Recently, the sub-district judge of the District Court of Eindhoven ruled that this did not constitute abuse of the law by the employer.[4] If the employer wishes to follow this route, he/it must do so immediately, because once termination by notice has been initiated (whether in a correct or incorrect manner), the employer cannot retract this.[5] It should be pointed out that there is one disadvantage to incorrect termination by notice: in such a case, the employer can no longer hold the employee to a non-competition clause.