What changes are coming to the transition payment compensation scheme?

The original legislative proposal provided for the compensation scheme to be restricted to small employers. Under that version of the legislative proposal, medium-sized and large employers would no longer receive compensation for transition payments made upon termination of an employment contract following long-term illness. However, through the memorandum of amendment, the government has opted for a complete withdrawal of the compensation scheme. According to the government, this measure will result in substantial savings. The withdrawal of the compensation scheme does not affect the employee’s statutory entitlement to a transition payment when the employer terminates the employment contract.

Transitional law: in which cases is compensation still possible?

Although the compensation scheme is being withdrawn, transitional law will continue to apply in a number of situations. In cases of long-term illness, a compensation scheme remains possible if the day following the end of the statutory 104-week waiting period for illness falls before the intended effective date of January 1, 2027. Any extension of the obligation to continue paying wages due to a wage penalty (loonsanctie) is not taken into account in this regard. For employers, this means that employees whose 104-week waiting period for illness ends no later than December 31, 2026, may, in principle, still be entitled to compensation. The decisive factor is therefore not when the employment contract ends or when the transition payment is actually paid, but when the 104-week waiting period expires. The employer must apply for the compensation within six months of full payment.

Even in the event of business closure, compensation may still be temporarily available under certain circumstances. The reference date for this is the date on which the first request for dismissal or termination was submitted. If that date falls before the law took effect, the current regime remains in effect.

Why was the compensation scheme originally introduced?

The transition payment compensation scheme for long-term illness was introduced because employers were confronted with significant costs. In addition to two years of salary continuation during illness and extensive reintegration obligations, employers were also required to pay a transition payment upon termination of the employment contract. In practice, this led to the phenomenon of “dormant employment contracts” (slapende dienstverbanden).  Employers kept employment contracts in place after their salary continuation obligations had ended in order to avoid paying a transition payment. The compensation scheme was intended to remove this financial incentive. It is noteworthy that the government itself acknowledges, both in the explanatory memorandum to the legislative proposal and in the memorandum of amendment, that withdrawing the scheme increases the risk of a resurgence of dormant employment contracts.

What does the withdrawal mean for the Xella ruling?

An important question is what consequences the withdrawal will have for case law regarding dormant employment relationships. In the well-known Xella ruling, the Supreme Court held that, as a matter of good employership, an employer must in principle cooperate with the termination of a dormant employment contract and pay compensation equal to the transition payment. A relevant consideration in that decision was that employers were (at least partially) compensated by the Employee Insurance Agency (UWV) for the transition payment paid. The government acknowledges that the withdrawal of the compensation scheme may affect the operation and scope of this legal principle. At the same time, it explicitly leaves the answer to this question to the courts. As a result, it cannot be ruled out that litigation will again arise in the coming years regarding whether, and under what circumstances, employers are still required to cooperate with an employee’s request to terminate a dormant employment contract and pay a transition payment.

Criticism on the chosen approach

The government’s decision to withdraw the compensation scheme has not been without criticism. The Dutch Council of State has recommended investigating whether the transition payment should be completely eliminated in cases of termination due to long-term illness. A factor in this is that the employer has typically already continued to pay wages for two years prior to the termination and has incurred significant reintegration costs. However, the government has not opted for this approach. According to the government, the transition payment serves a different purpose than the obligations to continue paying wages and to facilitate reintegration; furthermore, withdrawing the transition payment for employees with long-term work illness could lead to unjustified discrimination on the basis of disability or chronic illness.

Conclusion

The amendment legislative proposal has radically altered the original proposal. Whereas the initial proposal concerned a limitation of the transition payment compensation scheme, the current proposal provides for the complete withdrawal of the transition payment compensation scheme in cases of long-term illness and business closure. This raises questions about the consequences for dormant employment relationships, the future of the Xella ruling, and the interpretation of good employment practices.

Contact us

Parliamentary deliberations on the legislative proposal are still ongoing. We will continue to monitor developments and keep you informed of relevant next steps. If you have any questions about the implications for your organisation, please feel free to contact us.