Many Dutch companies post employees abroad. If these employees do not perform well there and/or if there is no suitable position for them in the Netherlands on their return, the employer may wish to terminate the employment.

This article discusses some of the issues involved in the dismissal of expats, partly in light of a judgment rendered by the Amsterdam Subdistrict Court earlier this year. The judgment concerned the question of whether and, if so, which payments made to an expat in connection with his/her posting should be taken into account when determining the amount of severance pay to which he/or she is entitled upon dismissal. However, before discussing severance pay, two other important issues arising in international employment conflicts are addressed: (i) the competent court and (ii) the applicable law. In addition, this article touches briefly on the applicability of the 1945 Extraordinary Employment Relations Decree (Buitengewoon besluit arbeidsverhoudingen 1945, "BBA") in international dismissal cases.

Jurisdiction

Before a court can address the question of which law is applicable to an international employment contract, it must first determine that it has jurisdiction to hear the case.

The Brussels I Regulation

For courts in an EU member state, including the Netherlands, the relevant jurisdiction rules are often those in Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the "Brussels I Regulation"), which applies if the defendant is domiciled in an EU member state.

Action by employer against employee - Under the Brussels I Regulation, an employer can in principle only sue an employee domiciled in an EU member state in the courts of that member state. In the Netherlands, this applies to both proceedings commenced by writ of summons and those commenced by an application (such as proceedings to rescind an employment contract by the subdistrict court).

Action by employee against employer – Under the Brussels I Regulation, an employer domiciled in an EU member state can be sued (i) in the courts of that member state or (ii) in the courts of another member state (a) where the employee habitually carries out his work or where he did so last, or (b) if the employee does not or did not habitually carry out his work in any one country, in the courts for the place where the business which engaged the employee is or was situated.

Choice of forum- An agreement on jurisdiction is only valid if it is made after the dispute arose. The employee is therefore not bound by a choice of forum made in advance in the employment contract.

National rules on jurisdiction

Scope - If the Brussels I Regulation is not applicable, the international jurisdiction of the Dutch courts is determined on the basis of national rules on jurisdiction.

Jurisdiction - The Dutch courts have jurisdiction if (i) the defendant is domiciled in the Netherlands or has his/her habitual residence there or (ii) if the employment is usually carried out in the Netherlands. This rule applies to both proceedings commenced by writ of summons and those commenced by an application (such as proceedings to rescind an employment contract before the subdistrict court).

Choice of forum - Under the national rules on jurisdiction, like those under the Brussels I Regulation, the employee is not bound by a choice of forum made in advance in the employment contract.

Applicable law

Once it has been determined that a court in an EU member state has jurisdiction, the court must determine the applicable law under the EC Convention on the Law applicable to Contractual Obligations 1980, ("the Rome Convention"), which applies irrespective of the nationality of the parties or the place of performance of the contract.

The main rule under the Rome Convention is that an individual employment contract will be governed by the law chosen by the parties. Despite a choice of law, however, the employee remains entitled to the protection afforded to him by the mandatory rules of the law which would be applicable under Convention in the absence of a choice of law.

In the absence of a choice of law, an employment contract is governed (a) by the law of the country in which the employee habitually carries out his work in performance of the contract, even if he is temporarily employed in another country; or (b) if the employee does not habitually carry out his work in any one country, by the law of the country in which the place of business through which he was engaged is situated. If it appears from the circumstances as a whole that the contract is more closely connected with another country, the contract will be governed by the law of that country. In practice, the "more closely connected" rule is often applied in relation to "classical" expats, if under the abovementioned rule of private international law the law of the employer's country is not already applicable to their employment contract. Particularly where the posting does not exceed five years, the employee remains insured in the employer's country for social security purposes and the contract contains expat provisions (e.g. provisions on the duration of the posting, allowances for the costs of the move and repatriation, etc.), in principle the law of the employer's country will be held to apply.

Does the BBA apply?

The applicability of Dutch law to an employment contract does not by definition mean that the BBA applies, and the applicability of foreign law does not by definition mean that the BBA does not apply. This question is very important because, if the BBA applies, the permission of the Industrial Insurance Administration Office (UWV WERKbedrijf) must be obtained in order to dismiss the employee in question. The BBA is applicable whenever the termination of an employment contract is deemed to affect the socio-economic interests of the Dutch labour market, even if the contract is not governed by Dutch law. In general, such interests will be deemed to be affected if the work is permanently performed in or from the Netherlands (and the employee is likely to claim unemployment benefits in the Netherlands as a result of the termination). The time of dismissal is decisive: should it have been clear to the employer at the time of the dismissal that the employee would fall back on the Dutch employment market? Other elements may also play a role, e.g. the work location, the employee's place of residence and where the employer is based. These criteria must be considered as a whole, making it difficult to provide a clear answer as to when the BBA applies.

Severance pay

If no suitable position is available for the employee on his/her return from the posting, or if the employer wishes to terminate the employment contract during the posting (irrespective of whether or not the employee is at fault), an important question arises in relation to the amount of any severance pay. Should any such compensation be based on the employee's salary including any additional expat allowances or should it be based on the salary he/she would have received if he/she had not been posted abroad?

The courts that have considered this question attach importance to whether the supplementary payment covers actual costs incurred or whether it more closely resembles a pure allowance or expat bonus which, under certain circumstances, could be regarded as de facto wages and should therefore be included in the calculation of the compensation. It is also argued that another important factor is whether the employment relationship with the Dutch employer continued. There is no conclusive answer as to whether expat allowances should be taken into account when determining the amount of any severance pay. The Amsterdam Subdistrict Court ruled on 22 April 1999 that expat allowances should not be considered when determining the amount of the compensation. The Eindhoven Subdistrict Court, on 23 September 1994, also only considered the Dutch basic salary, and not the salary in Saudi Arabia which (including the allowances) was considerably higher.

However, in a case decided by the Amsterdam Subdistrict Court on 8 January 2009, the court ruled that the expat allowance should, albeit to a limited extent, be taken into account in applying what is referred to as the "subdistrict court formula" in an expat case (this formula is used to determine the amount of severance pay that should be awarded when an employment contract is rescinded). The court took the Dutch salary as a basis, but added 25% because the expat in question had had a certain freedom to use the allowances for his own purposes (and therefore included a remuneration component) and because the expat had adapted his lifestyle to this allowance. The court then applied a deduction of 20% because the allowance would only be taxed at a maximum rate of just 27.5% due to the employee's status as long-term expat.

In this particular case, the expat's severance pay was determined by:

  1. the A factor: the employee's years of service under the subdistrict court formula;
  2. the B factor; the employee's basic salary + 25% expat allowance + average bonus / 12;
  3. the C factor; a correction factor of 1.3. The court in this case considered it important, inter alia, that Philips had not made sufficient efforts to re-assign the employee; and
  4. a deduction from the result of A*B*C for (i) the compensation already paid to the employee under mandatory Brazilian law and (ii) the tax component of 20%.

Conclusion

When dismissing an expat, it must first be determined whether a dismissal permit from the Industrial Insurance Administration Office is required. If the expat will not seek a new job or social security benefits in the Netherlands, then (in principle) a permit is not required, and the employment contract may be terminated without further ado.

If an employee is dismissed, he/she may of course decide to commence an action for damages based upon a manifestly unreasonable dismissal. In such an action, it must be determined which court has jurisdiction, which law applies and which factors the court will take into account when awarding damages. In cases of this type decided over the past several years, the courts have often applied the subdistrict court formula, which is used in rescission proceedings. However, recently the courts of appeal have adopted a difference approach (see the article of Raymon van Heusden in this newsletter).

If the employer wishes to commence proceedings to rescind the employment contract of an expat, it should also be determined which court has jurisdiction, which law applies and which factors the court will take into account when awarding compensation. The court may deviate from the subdistrict court formula in a manner favourable to the employee, if the expat received allowances on top of his/her basic salary during the posting which were not purely intended to cover expenses. On the other hand, if the severance pay will be taxed at a favourable tax rate, the court may apply a deduction to the employee's detriment.