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Review of a Settlement Agreement under Dutch employment law (also “VSO”): aspects to consider

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A fired employee in need of a Settlement Agreement

Review of a Settlement Agreement under Dutch employment law (also “VSO”): aspects to consider

The settlement agreement under Dutch employment law (in Dutch: Vaststellingsovereenkomst or VSO), i.e. the agreement to terminate employment contracts, has become the most in-demand agreement within a short period of time. We receive requests on a daily basis from employees who want an employment lawyer to review their employment contract, or requests from employers who need a settlement agreement (or VSO).

And that’s not surprising. Under Dutch law, most employment contracts end because the term of the contract expires (in the case of a fixed-term contract) or because the employee gives notice. Apart from those cases, the most common method of terminating an employment contract is the termination agreement (pursuant to Book 7, Section 670b of the Dutch Civil Code). Particularly in situations where the employer takes the initiative to terminate the employment contract.

Aspects to consider in a settlement agreement

Below I will give an additional explanation of the main subjects adopted in the VSO. Obviously, no employment contract is the same, and every VSO is different. Before you sign a VSO, it hernaus

t’s therefore generally advisable to have a Dutch employment lawyer take a look at it.

1. Settlement agreement and the right to unemployment benefits

The employer and employee can lay down written arrangements on the termination of a Dutch employment contract in a termination agreement.

A relevant aspect for the employee is that the moment of termination of the employment contract will be in line with the moment the employee is eligible for unemployment benefits. For this reason, the settlement agreement must adequately reflect the fact that the notice period applicable at the time of termination of the employment contract has been properly observed. In addition, to be on the safe side, and in view of the employee’s unemployment-benefit rights, the VSO often includes a provision stating that the termination of the employment contract is not due to the employee (no notice was given by the employee), as the employer has taken the initiative to terminate the employment contract.

2. Transition fee

When an employment relationship ends at the initiative of the employer, under Dutch law an employee is entitled to a transition fee. The transition fee is a legal right that has replaced the subdistrict court formula, as it used to be called. Since 1 January 2020, this right is effective from the first working day and regardless of the duration of the employment and is accumulated equal to a third month’s salary per year of service. However, if a different calculation or provision is laid down in a collective agreement, the employee will be tied to such collective-agreement provision (even if it should be less favourable). Various tools are available online to calculate the transition fee, for example at the Dutch website ontslag.nl.

3. Severance pay

A severance payment may obviously comprise more than just the transition fee, and does not necessarily have to be equal to the transition fee. The amount of the severance pay differs case by case and results from negotiations between the employer and employee. In addition to a sum in cash, the severance pay may for example also include extra training, outplacement or compensation for (legal) costs.

4. Exemption from work

Once it has been confirmed that the employment contract is going to end, the motivation tends to fade away. In order to enable the employee to look for another job and to prevent demotivation from spreading to others within the organisation, the employee may be exempted from work – by way of “severance pay” – before the end date. In that case, however, provisions must be in place with regard to the effect on the severance pay if the employee finds new employment before the end date.

5. Non-solicitation clause & non-competition clause

Many employment contracts under Dutch law provide for non-solicitation and/or non-competition clauses. These clauses are usually included for the time the employment contract comes to an end, as is currently the case. Because of the relevance of these clauses, and also because the employer’s and employee’s interests can be strongly opposed to these clauses, it will be useful to check the employment contract when drawing up the settlement agreement and, where necessary, make additional or different arrangements about non-solicitation and non-competition in the settlement agreement.

6. Reflection period

Make sure to include the provision of a 14-day reflection period for the employee in the settlement agreement (i.e. the written termination agreement pursuant to Article Book 7, Section 670b of the Dutch Civil Code). This reflection period is mandatory and will be extended by one week if not stated in writing in the termination agreement. During this reflection period, the employee has the right to terminate the termination agreement.

7. Legal assistance / budget

Many employers point out to the employee the use of seeking legal assistance when entering into a settlement agreement. Often, they also provide a budget to the employee (usually between EUR 500 and EUR 750 excluding VAT) to have the settlement agreement reviewed by a Dutch employment lawyer. This is generally considered to be proper employer practice. On the other hand, it also helps an employee to make a decision, which facilitates a smoother conclusion. Our experience is that such budget – if the draft version of the VSO has been properly drawn up by the employer and the employer deals pragmatically with any changes proposed by the employee – will suffice to review and finalise the average employment contract.

8. Final discharge

In general, the final discharge finalises the settlement agreement. In this section, the employer and employee confirm that – once the arrangements in the SA have been settled – they no longer have any further claims in respect of each other. The object is to put a definite end to the relationship between the employer and the employee where possible in the SA and to make sure that no open-ended elements are left outside the SA.

In conclusion

Above I have described a number of general aspects to consider from the perspective of Dutch employment law. I must note once again though, that no Dutch law employment contract is the same, and therefore this simplistic representation squeezes the complexity of reality. This may particularly be the case where Dutch company law comes in, such as for example in the termination of an employment contract of a director under the articles of association, or the termination of an employment contract of an employee who participates in an option plan or holds depositary receipts for shares. Yet the more complex the situation, the higher the relevance to settle the matter in a VSO rather than in legal proceedings.

Do you have any questions about Dutch employment law or Dutch company law? Or would you like to have your settlement agreement reviewed? Please contact Lukas Witsenburg or one of our employment lawyers.

Penrose law firm, Amsterdam.

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