The Work and Security Act (WWZ) introduced two types of redundancy pay into employment law: transition pay (transitievergoeding) and fair compensation (billijke vergoeding). Transition pay is intended, on the one hand, as a compensation for dismissal and, on the other, as a way of easing the transition to a new job. Transition pay is required if an employment contract has run for at least twenty-four months and is terminated, or not extended, at the instance of the employer, or if, due to seriously culpable acts or omissions on the part of the employer, it is terminated, or not extended, at the instance of the employee. Transition pay is calculated on the basis of the salary and age of the employee and the duration of the employment relationship in question.

Fair compensation is (additional) redundancy pay which the court can award an employee in the case of seriously culpable acts or omissions on the part of the employer, such as using false grounds for dismissal, intentionally creating a strained working relationship, non-fulfilment of reintegration obligations, discrimination or sexual intimidation.

Whilst transition pay is calculated using a fixed formula, the court has a free hand in determining the extent of fair compensation. As a result, fair compensation is a kind of ‘black box.’ In court decisions, it fluctuates enormously, the lowest amount thus far awarded having been € 0,00 and the highest, € 141.500 (gross).

The Netherlands Supreme Court recently helped improve clarity as to the circumstances which must be taken into consideration when setting the height of fair compensation.

What was at issue?

Since 1989, a female employee, a hairdresser, has worked one afternoon per week, receiving a monthly salary of € 224.51. After a change of ownership in 2013, the employer makes a termination proposal (January 2014). The employee in turn makes a counterproposal, but the parties fail to reach agreement. The employer then assigns the employee cleaning tasks. Not until he receives a letter from the employee’s lawyer does the employer let the employee return to cutting hair.

The ensuing peace is short-lived: in early January 2015, the employer applies for a dismissal permit for the employee on the grounds of reorganisation. The Employee Insurance Schemes Implementing Body (UWV) refuses him the permit, as he has failed to make the need for reorganisation plausible.

Shortly thereafter, a dispute arises about the employee’s application for leave, which, in connection with her husband’s company, is linked to the holiday period for construction workers in the Netherlands. She nevertheless goes on holiday during the period for which the leave was requested. The employer notifies her by letter that she has been placed on non-active status, writing: “We are terminating your employment, with due observance of the statutory term of notice.

The employer then pays the employee her salary for the term of notice, and transition pay to a gross amount of amounting € 1,596.

Midden-Nederland District Court

As the employer has terminated the employment agreement without the consent of the employee or a permit from the UWV, the employee can request the subdistrict court to set aside the termination (= restoration of the employment agreement) or to award her fair compensation. She chooses the latter option. The subdistrict court then awards her fair compensation amounting to € 4,000 (gross).

Both parties appeal. The Arnhem-Leeuwarden Court of Appeal upholds the decision of the subdistrict court. According to the Court of Appeal, fair compensation should have a punitive and deterrent effect and must therefore be sufficiently high to prevent such actions on the part of the employer in the future. In the view of the Court, the duration of the employment relationship, which (amongst other things) has a bearing on the question as to the consequences of dismissal for the employee, may not be used as a criterion, as such consequences have already been taken into account in the setting of transition pay.

The Supreme Court slaps the Court of Appeal on the wrist: in its view, fair compensation was not established with a specifically punitive character in mind. Thus, such a punitive character must not play a role in the determination of fair compensation. It can be seen from the relevant legislative history that it was felt “that the employee must be compensated, including for the purpose of preventing such acts or omissions on the part of the employer.” Thus, in the case of fair compensation, the main emphasis must be given to compensating the employee.

According to the Supreme Court, then, the consequences of dismissal for the employee must indeed be taken into account in determining the compensation of the employee for the seriously culpable acts or omissions of the employer. That fair compensation is pertinent, is evidenced by the fact that the employee can choose between the setting aside of termination and fair compensation.

In the view of the Supreme Court, in determining the extent of fair compensation, all of the circumstances of the case can be taken into consideration. It gives the following examples of such circumstances:

  • the duration of the employment agreement which would have had to be taken into consideration if the employee had had the termination set aside;
  • whether the employer could also have terminated the employment agreement in a lawful manner; what term would have been appropriate for this and presumably would have been observed;
  • the income which the employee would have enjoyed if the termination had been set aside;
  • the degree to which blame can be attributed to the employer based on the grounds for the voidability of the termination;
  • whether the employee’s reasons for relinquishing her right to a setting aside of the termination are attributable to the employer (to the extent that future loss of wages is involved);
  • whether the employee has now found another job; the income he is able to enjoy from it, and the (other) income which he can in reasonableness earn in the future;
  • any transition pay which may be coming to the employee (which he will not receive in the case of the setting aside of the termination).

Consequences in actual practice

With its judgement, the Supreme Court increased clarity concerning the character of fair compensation. ‘Punishing’ employers with sky-high fair compensation on the grounds of the ‘punitive character’ of the remuneration, is no longer permitted. As a consequence of the pointers provided by the Supreme Court in this regard, judges will have to specify what circumstances they have taken into consideration in setting fair compensation and how they arrived at such an amount. However, in view of the fact that the salary which the employee would have been able to enjoy if the employment agreement had been extended for several years can be taken into account, fair compensation can nevertheless still wind up being high. Thus, employers must continue to be on their toes.

And the hairdresser?

The Supreme Court set aside the decision of the Court of Appeal and referred the case to the ‘s-Hertogenbosch Court of Appeal for further handling and a decision. We will keep you informed.

You can find the full ruling (in Dutch) here.