Signing a settlement agreement: 5 points to take into consideration

Irene Lansen

Under Dutch law, employees are very much protected from being dismissed, when they have entered into a permanent employment contract. In principle, employers can only dismiss an employee on the basis of certain grounds, such as performance issues or a bad relationship. Depending on the specific ground for dismissal, an employer must obtain permission for dismissal from either the court or the Dutch Employee Insurance Agency called the ‘UWV’. However, an employer may also offer the employee a settlement agreement. If the employee agrees to such settlement, permission from the court or UWV is not required.

So, what are the main points to consider before signing a settlement agreement?

1. Get legal advice!

 It is important for employees to obtain solid legal advice before signing a settlement agreement. A lawyer can review the settlement agreement and also assist with negotiating a better deal. Normally, an employer will offer to pay for (part of) the legal fees for instructing a lawyer. This may be an amount arranging from € 750 to € 1.500 ex VAT. It is also in the interest of the employer that the employee knows exactly what he agrees to and is happy with the deal. Employees have a statutory period of 14 days after agreeing to the settlement to change their mind and revoke the agreement.

2. Settlement payment

 In case of termination of employment, an employee is entitled to a so-called transition payment. From 1 January 2020 this transition payment amounts to a third of a month’s salary per year worked. However, an employee will often be able to negotiate a better deal, as the employer will be keen to avoid time-consuming and costly court or UWV proceedings. Some years ago, under Dutch (case) law it was common to award 1 month salary per year of service, in case neither the employee nor the employer was at fault for the termination of the employment agreement. Often, this award is still used as a starting point in negotiations.

Many expats in the Netherlands qualify for the 30% ruling. This entitles employees to a tax free allowance of 30% of their salary to cover additional costs for working away from their country of origin. However, a settlement payment is not covered by this 30% ruling. Instead, the normal tax rate is being applied. In 2020 this rate is 49,5% for any income including the settlement payment over and above € 68.507. As a result, the effective net amount of the settlement payment will often be lower in comparison to the monthly net salary payments employees are used to receive.

3. Notice period

In the settlement agreement, the employer and the employee should take into account the employer’s notice period.

The applicable notice period is usually included in the employment agreement. If there is no reference to any notice period or the employment agreement refers to the statutory notice period, the amount of notice depends on the length of service of the employee. Up to 5 years of service the notice period is 1 month. For every additional 5 years of service another month of notice is applied, up to a maximum of 4 months’ notice in case of 15 years of service or longer.

Notice should be given at the end of the month, unless another date has been agreed in the employment agreement. This means that, if parties enter into a settlement agreement on e.g. 15 March and a notice period of 1 month applies, the termination date is 1 May.

The employer and the employee may also elect an earlier termination date. In such case, the employee should ensure that the employer still compensates the employee for his salary during the notice period, by increasing the settlement payment with a lump sum equivalent to this salary. This is also important, in case the employee would like to apply for unemployment benefits, a so-called ‘WW-uitkering’. Those benefits will be only be paid after the applicable notice period has expired.

4. Garden leave

 In addition, it is common for employers and employees to agree that the employee will be exempt from work, once the parties have entered into the settlement agreement and the employee has handed over his work. This prevents the employer from having an employee at work who is no longer motivated to perform, whilst the employee has the opportunity to look for another role elsewhere. In return, although employees are entitled to be paid out their remaining holidays after termination of  employment, parties often agree that any leave will be deemed to have been taken during garden leave.

5. Non-competition clause

Finally, the settlement agreement may include a clause that the agreed non-competition clause will be waived after the termination of employment. Whether this is acceptable for the employer depends on the nature of the employer’s business and the employee’s role. Waiving the non-competition clause is of course in the interest of the employee, as this usually increases his chances to find another job. Often, when employers agree to waive a non-competition clause, any confidentiality obligations will remain applicable. This means that, if the employee would join a competitor, he is not allowed to disclose any confidential information obtained from the employer.

In case you have been offered a settlement agreement by your employer and you would like to obtain legal advice, please feel free to contact Irene Lansen to assist you.