Changes in the formula used for the calculation of severance
Dutch courts use the following formula for the calculation of severance: A x B x C. This formula is referred to as the ‘Cantonal Court Formula’.
The Formula described above has been amended as of 1 January 2009. The change primarily relates to the A-factor, which represents the accrued years of service adjusted for age.
Until 31 December 2008, years of service accrued in the below age brackets were multiplied by the following factor:
< 40: 1.0
> 50: 2.0
Under the new Formula, years of service accrued in the below age brackets will be multiplied by the following factor:
> 54: 2.0
The B-factor in the Formula was (and will remain) the sum of the following elements (all on a monthly basis):
- base salary;
- statutory or contractual holiday allowance;
- other fixed financial elements;
- average variable pay received over the preceding 3 (or 5) years.
Some courts in certain circumstances also included employer’s monthly pension contributions. However, under the new Formula, the B-factor explicitly excludes employer’s monthly contributions to a pension scheme, health insurance, expense allowances and the financial value of a company car (except for in very limited circumstances).
The C-factor was (and will remain) a multiplier to be set at the discretion of the court, depending on the extent to which the grounds for termination of employment are attributable to one party or the other. In theory, the C-factor may range from zero to an indefinite number. In reality, in clear-cut redundancy cases (disappearance of position and no options for redeployment) the C-factor will usually be 1. In other situations (underperformance, clash of characters, etc.) the C-factor usually ranges from 0.5 to 2.0. In cases of relatively brief periods of employment, i.e. less than 3 years, courts have tended to set the C-factor substantially higher than they would do under identical circumstances if the employment lasted longer than 3 years.
Under the new Formula, some minor changes are anticipated to the manner in which the C-factor will be set. In cases of relatively brief periods of employment, courts will now in principle no longer deviate from the ‘normal’ system of determining the C-factor (except for in very limited circumstances). Under the new guidelines, when determining the C-factor, the courts will also consider aspects of ‘employability’, the extent of activities initiated by the company to increase an employee’s employability and the financial position of the company.
Effect on employers
These changes will impact the amount of severance to be awarded to an employee upon termination, and employers should be aware, in particular, of the changed impact of:
- the age of the employee;
- relatively brief periods of employment;
- aspects of ‘employability’ and an employer’s efforts to increase them; and
- the financial position of the company.
Maximisation of severance
Dutch courts use the Cantonal Court Formula for the calculation of severance. Currently, the severance is only capped by the amount of income lost by the employee until he is entitled to receive his pension.
The Dutch legislator proposes to maximise the severance, for employees who earn a gross annual salary of 75,000 Euros or more, at 1 year’s salary. This cap would only apply to employees whose employment agreement is terminated by the court. Parties may therefore agree otherwise.
Currently the proposal is still at an early stage of the legislative procedure. It was submitted to the Council of State for advice in November 2008.
Effect on employers
Employers should be aware that this pending legislative proposal aims to maximise severance payments that are awarded to an employee with a gross annual salary of 75,000 Euros or more. Acceptance of the proposal is expected to have a considerable decreasing effect on the amounts of severance to be awarded by the courts. As a result, it is expected that this will affect the amounts of severance that are negotiated and agreed upon between employers and employees in termination agreements.
Dutch employers have a duty to hold suitable travelling insurance
Dutch employers have a duty to secure a safe working environment. Failure to do so will render an employer liable for any damage suffered by an employee in the performance of their duties. Arranging for a safe working environment is clearly much harder to do if the performance of an employee’s duties requires travelling.
In 2008 the Dutch Supreme Court ruled in two cases that the employer’s duty of care includes the duty to hold suitable insurance, at its own expense, for the benefit of its employees. The insurance should cover all risks that arise when an employee is travelling in the course of performing his duties. In principle, the employer will not be liable for any damage suffered by an employee when commuting to and from work. However, there is often a grey area between commuting and business travel, e.g.:
- the employee travels from a customer's site to his own address at the end of a working day; or
- on his way home, the employee makes a detour to drop a package at the postal office.
Failure to provide insurance as described above will render the employer liable for any damage suffered by the employee during such travelling, regardless of the employer not having any control over the risks that may arise in traffic.
The insurance should cover travelling by all means of transport (e.g. walking, bicycle, car). It is recommended that insurance coverage for the grey area described above, is also sought.
Effect on employers
It is recommended that employers verify their current insurance coverage with regard to risks arising in respect of employees travelling in the performance of their duties. Employers should also ensure that employees travelling as passengers will also be covered by the insurance policy.
Dutch Supreme Court, 1 February, 1 February and 12 December 2008, JAR 2008/56, 57 and LJN: BD3129