Global menu

Our global pages

Close

Supreme Court decision: termination of dormant employment contracts

  • Netherlands
  • Employment law

21-11-2019

On 8 November 2019 the Supreme Court ruled on the admissibility of so called ‘dormant’ employment contracts (slapende dienstverbanden).

A dormant employment contract is an employment contract with an employee who has been absent from work due to long term illness (generally: 2 years or longer), is not working for the employer and thus no longer receives a salary or any other related benefits, but is nevertheless kept “on the payroll” of the employer. Employers often decided to keep employment contracts dormant, rather than terminating such employment contracts to prevent having to pay the statutory severance payment (transitievergoeding) to the employee. According to Dutch law employees with dormant employment contracts are also entitled to the statutory severance payment at termination. It followed from previous lower case law that keeping employees on a dormant status was allowed and did not constitute a breach of law.

The Supreme Court does not share this view. According to the ruling of the Supreme Court, employers are now obliged to agree to a proposal from an employee with a dormant employment contract, to terminate this employment contract with mutual consent, subject to the granting of the statutory severance payment. The grounds for this obligation for employers is the principle of good employment practices. An exception to the obligation to terminate the dormant employment contract and to pay the statutory severance amount can be accepted in cases where the employer has a reasonable interest not to terminate the employment contract, e.g. when there is a reasonable expectation that the employee will be able to re-integrate in the near future.

Another important indication given by the Supreme Court relates to the Compensatory Scheme Act regarding the payment of the statutory severance to long-term ill employees that will come into force on 1 April 2020 (the “Compensatory Scheme”). Based on this Compensatory Scheme, employers who meet the requirements are compensated by the UWV (the Dutch governmental Employee Insurance Agency) for the statutory severance paid to long-term ill employees, capped at the amount that was owed to the employee at the time the employer was first able to terminate the employment contract (generally: after 2 years of illness), OR capped at the amount that will be owed to the employee under the new Balanced Labour Market Act, that will enter into effect on 1 January 2020, if this amount is lower.

According to the Supreme Court, given the fact that an employer can be compensated, financial grounds are no longer deemed to be a valid reason to not terminate a dormant employment contract.

Amount of the statutory severance

The amount of the statutory severance that shall be paid by the employer to dormant employees, based on the ruling of the Supreme Court, is the amount that the employer was obliged to pay at the time at which it was first able to terminate the dormant employment agreement (i.e. at the end of the period during which the employer was obliged to continue the ill employee’s salary payment).

A point of discussion that arose after the ruling, relates to the situation in which the employee would in or after 2020 propose to the employer that his employment contract is terminated and that the statutory severance payment is paid. Because of the new law that will enter into effect as per 1 January 2020, in certain situations the statutory severance that is payable to the employee in 2020 will be a lower amount than the statutory severance that was payable at the time the employer was first able to terminate the dormant employment agreement (i.e. generally after 2 years of illness).

For such cases, a distinction shall be made between two amounts: (i) the amount that the employer is obliged to pay based on the ruling of the Supreme Court and (ii) the amount that will be compensated to the employer via the Compensatory Scheme. Following the foregoing, the situation could arise in which (i) the amount that the employer is obliged to pay to the employee based on the ruling (i.e. the amount payable after 2 years of illness, which is very likely to be the severance payment that applied before 2020) is higher than (ii) the amount that for which the employer will be compensated by UWV if parties agree to a termination in 2020 (i.e. when the new statutory severance payment applies).

To mitigate the risk that the employer is confronted with this situation that the amount compensated is less than the employer will pay to the employee, it is recommended to calculate for all employees with dormant employment contracts what the statutory severance would be in case of termination in 2019 and what this amount would be in case of termination in 2020. Should these two amounts differ (significantly), it is recommended that an agreement regarding the termination of the employment contract is reached still this year, with the termination date of the employment contract also still this year (2019). The actual payment of the statutory severance can be agreed to take place at a later time (e.g. in 2020), or e.g. in instalments. With this approach the employer mitigates the risk that it will be compensated for a lower amount than the statutory severance payment that was due to the employee in 2019 as part of the Compensatory Scheme.

Who takes the initiative?

In principle, employers are not obliged to take the initiative to terminate the dormant employment contract. The Supreme Court only adopted an obligation for employers to agree to a proposal from an employee with a dormant employment contract to terminate his employment contract and pay him the statutory severance payment.

However, employers are advised to actively inform employees with a dormant employment contract at short notice that the Supreme Court has given the fore mentioned judgement (i.e. still in November or early December 2019). If employers fail to do this, they run the risk that employees who have not noted the Supreme Court decision themselves, and therefore do not propose to their employer to terminate their employment contract before 1 January 2019, blame their employer that it has acted contrary to good employment practices. On that basis, employees could claim that they are entitled to be paid the higher statutory severance amount by their employer, while employers will – provided that they meet the requirements in this respect – only receive compensation amounting to the lower statutory severance amount.

Conclusion

In conclusion, the Supreme Court has adopted the obligation for employers to cooperate with the termination of so called dormant employment contracts. It is recommended that employers take action at short notice, still in November or early December 2019. Employees with a dormant employment contract should be actively informed that the Supreme Court has ruled in their favor. When employees propose the termination of their dormant employment contract to their employer, employers are in principle required to accept this proposal and pay the statutory severance amount. In the event that the statutory severance amount payable after 2020 is lower than the amount payable in 2019, it is recommended that the termination of the dormant employment contract is still in 2019 (if needed, without taking into account the applicable notice period). If the employee agrees, the actual payment of the statutory severance amount can take place in 2020.

Questions?

Should the above lead to any questions, our team is of course happy to assist.

For more information contact

< Go back

Print Friendly and PDF
Subscribe to e-briefings