Balanced Labor Market Act: Transition Payment 2020
As of 1 January 2020, the transition payment calculation will change. Below you will find a summary detailing the most important changes.
- From January 1, 2020, the employee will be entitled to transition payment from their first working day instead of only after 24 months.
- The structure of the transition payment allowance has been adjusted, with the result that older employees and employees with a longer employment contract will receive a lower transition allowance.
- Any costs that increase the employability of the employee can be deducted from the transition allowance.
- The Supreme Court has ruled that the employer is obliged to terminate the employment of a long-term disabled employee upon their request with payment of the statutory transition payment.
Accruement of Transition Payments
When the Balanced Labour Market Act (WAB) comes into force, employees will be entitled to a transition payment from their first working day. Currently this right only arises after 24 months of employment. The duration of the employment contract also no longer needs to be rounded off to half-years of service. This means that even with an employment contract of, for example, four months, the employee will still be entitled to a transition payment.
On the other hand, the structure of the transition payment scheme will be adjusted. The increased accrual via long-term employment (half a month’s salary per year of service for those with over 10 years of service) will be abolished. The transitional arrangement for older employees will also end on 1 January 2020. This means that from 2020 a transition payment of a third of a month’s salary will be calculated for each year of service. This will also apply after 10 years of employment, regardless of the age of the employee. Only the length of the employment contract and the gross wage will be relevant for the calculation of the transition allowance.
The consequence of this adjustment is that older employees and those who have worked for many years will receive a lower transition allowance as of 2020.
Calculating transition payments: the salary component
The agreed monthly salary serves as the basis for this calculation. However, this monthly salary figure must include:
- Holiday allowance per month;
- Fixed year-end bonus (for example, 13-month bonus) counts for 1/12;
- Any agreed fixed salary components (for example, shift work allowances, overtime and commission). An average of 12 months from the date of the end of employment must be used for the calculation.
- Any agreed variable salary components (for example bonuses or profit shares). An average of all variable salary components in the three years prior to the year in which the employment contract is terminated must be used for the calculation.
Costs that can be deducted from transition payment
Any investments made by the company to increase the performance of the employee and other costs incurred for the promotion of their knowledge and skills that enabled them to assume another position – also within the same organization – can be deducted from the transition payment.
This may include costs for outplacement, costs for (re)training, costs for training that is not related to an employee’s own position and any costs for a longer notice period in which the employee is exempt from work. The costs incurred for the exercise of the employee’s current position cannot be deducted. These costs can only be deducted from the transition allowance if the employee has agreed to this in writing.
When must a transition payment be made?
The transition payment is due if:
- The employment contract has been canceled by the employer or;
- The employment contract has been terminated at the employer’s request or;
- The employment contract has been terminated by operation of law and has not been continued at the initiative of the employer;
- The employment contract has been canceled or dissolved by the employee as a result of serious culpable actions on the part of the employer.
This means that a transition payment is not required if the employee cancels his own employment contract. A transition payment is also not required if the contract is terminated by mutual consent, however, in that case the employer and employee will have to agree on a different payment.
Transition payments after long term medical leave
Transition payments are also required after medical leave. The payments are also accrued over the long-term period that the employee was unable to work. This is the case, for example, if the employee is ill for more than 2 years and his employment contract is subsequently terminated. In order to avoid paying the transition allowance, in the past the employment of some workers was sometimes kept dormant after this 2-year period. On November 8, 2019, the Supreme Court ruled that the employer is obliged to terminate the employment of a long-term employee who is unable to work. The statutory transition payment must then be paid.
In addition, the Supreme Court has ruled that “being a good employer” requires an employer to not keep an employee in “dormant employment” in order to avoid the payment of the transition allowance. This means that if an employee is on medical leave for more than 2 years and has no prospect of recovery, the employee can request the employer to terminate the employment with the full payment of the statutory transition payment. The Supreme Court stated that the transition payment does not have to be more than the amount that would be due after two years of illness or two years of illness plus wage penalties. If the employee becomes incapacitated for work after 3 years of employment and remains unfit for 2 years without the prospect of recovery and without salary penalties, the transition payment will have to be calculated over the entire 5-year employment contract.
If you have any questions about the new transition compensation or about the Balanced Labour Market Act, please feel free to contact our specialists.