16 October 2018

Dutch Supreme Court: soon-to-be retired employees entitled to full transition payment

In a 5 October judgment, the Dutch Supreme Court ruled that employees whose employment agreements are terminated just before their retirement date are entitled to a full transition payment. This holds true even in situations where the transition payment is higher than the total salary amount an employee would have earned had he or she continued working until their retirement date.
This ruling is a clear break with Dutch legal practice before the entry into force of the Work and Security Act (Wet werk en zekerheid) in 2015. Under old law, the severance payment was based on the Cantonal Court formula. The payment was subject to a maximum amount equal to the missed income up through the employee’s retirement date. According to the Supreme Court, the drafters of the Work and Security Act deliberately left out the possibility of limiting the transition payment in such cases. A looming retirement date does therefore not give employers a green light to pay a soon-to-be-retired employee a lower transition payment.

The Supreme Court’s ruling (in Dutch only) confirmed the Court of Appeal’s decision to grant the full transition payment to an employee (instead of a partial transition payment, which the lower court ordered), who was dismissed after being ill for two years. The sub-district court had ruled that granting a full transition payment to an employee who was months away from retirement would be unacceptable according to established standards of reasonableness and fairness. The sub-district court further reasoned that the transition payment was disproportionate to the employee’s loss of income.
The Supreme Court ruled that an appeal to the restrictive effect of reasonableness and fairness can only succeed in exceptional cases because they are mandatory rules of law, and courts should apply them sparingly. The Court further held that transition payment provisions are mandatory and the legislature purposely chose an abstract and standardised system, which does not allow for any exceptions other than those laid down in the law. This means that regardless of whether the employee remains unemployed after termination of the employment agreement, or if the employee has already found new employment, the employee is entitled to a transition payment. Employees whose employment agreement is terminated after two years of illness are also entitled to a transition payment.
When planning to dismiss an employee close to the age of retirement, employers should remember that such employees are entitled to the full transition payment, even if they are approaching their retirement date. It may be a more attractive option for the employer not to dismiss the employee but to wait for the employee’s retirement, as employees who are dismissed in connection with or after their retirement age are excluded from the right to a transition payment. Maximising the amount of the severance payment to the amount of the missed income from the termination date until the retirement date, as was common under old law, no longer holds.
Stefan Sagel successfully litigated the case on behalf of the employee before the Supreme Court.