Dormant employment contracts and compensation for severance pay: the state of play

On Friday, November 8, 2019, the Supreme Court issued an important ruling on the issue surrounding dormant employment contracts. Until then, there was a lack of clarity as to whether employers were allowed to keep employment contracts dormant in order to escape the transitional compensation. This article discusses the ruling and its practical implications. It also addresses whether, and if so how, you as an employer can be compensated for the transitional compensation after long-term disability after April 1, 2020.

Dormant employments?

Since the enactment of the Work and Security Act in 2015, the employer owes a transition fee if the employment contract ends after 24 months by operation of law and/or at the initiative of the employer. This is therefore also the case if the employer terminates the employment contract due to long-term disability. This comes into play if the employee has been ill for two years. This is problematic because the employer has also continued to pay wages during illness for two years.

Employers soon found a clever solution to avoid having to pay that transition fee: they left the employment contract in place, but no longer called the employee to work or paid out wages. This practice, of keeping employment contracts dormant, has occupied minds in recent years.

Initially, judges ruled that employers could not be required to proceed with termination because the law simply did not require them to do so. Thus, long-term sick employees did not seem to have strong means in their hands to get their employer to pay them the transition allowance.

The Compensation Act

But then in mid-2018 it was legislated that employers could from now on have the transition compensation in case of long-term disability compensated by the General Unemployment Fund funded by premiums paid by employers. The legislator also apparently thought it was unfair that employers should first have to continue paying wages for two years and then also have to deduct that transition compensation. The law takes effect April 1, 2020, and its terms will be discussed further below.

The discussion settled

The fact that employers will now be able to start being compensated for the transitional compensation for long-term disability offered employees new arguments in the discussion surrounding dormant employment. The matter was referred to the Supreme Court, which ruled on the issue on Nov. 8, 2019.

In short, the Supreme Court has ruled that, due to 'good employment practices', an employer is in principle still obliged to terminate a dormant employment contract at the request of a long-term unfit employee, subject to payment of the statutory transitional compensation. Since there is a law stipulating that employers are compensated by the UWV for payment of the transition fee to a long-term unfit employee, the argument that an employer is being driven to high costs no longer applies, according to the Supreme Court.

Legitimate interests

Only if the employer has "legitimate interests" in keeping the employment dormant does the employer's obligation to terminate not apply. This plays out, for example, if there are still reintegration possibilities. Not being able to pre-fund the compensation may be reason to wait until April 1, 2020 when the compensation scheme comes into effect. After that, however, according to the Supreme Court, that no longer seems to be a legitimate interest. Almost reaching retirement age (after which the right to the transitional compensation lapses) is not a justified interest.

What about compensation? 

'Fortunately,' then, that transition allowance does qualify for compensation. By the way, this applies to any transition compensation paid after the employee has been sick for two years. The following conditions apply:

• Employment ended due to long-term disability;
• The employee was paid the transition allowance to which he was entitled;
• the employee was still sick when he or she left employment;
• the application must be made within a maximum of six months after payment of the transition allowance and through the employer portal of uwv.nl.

What documents should I submit?

In order to evaluate the application for compensation, you must keep a number of documents carefully. These include the following information:

• Employment contract;
• proof of termination (for example, the settlement agreement, termination letter or UWV decision);
• paychecks for the entire period of illness;
• the calculation of transition compensation;
• proof of payment of the severance pay and its date (even if paid in installments).

You must submit these documents in evidence with the application.

The amount of compensation

Now what if you have kept employment dormant for three years and as a result of the Supreme Court's ruling you proceed to terminate, is the entire transitional compensation eligible for compensation? The answer to that is "no.

Of note is the fact that the amount of compensation under the settlement is capped at (i) the amount of severance pay the day after the employee had been sick for two years or (ii) the amount of wages continued to be paid during illness if lower.

The latter may come into play in the situation of an early IVA benefit or a no-risk policy. In that case, the employer does not continue to pay wages during illness but is paid by the UWV. Please note that under the Do It Yourself industry collective bargaining agreement, there is an obligation to supplement the employee's salary to 100% in the first year of illness and to 80% in the second year of illness.

If the total salary paid by you as an employer during illness is less than the amount of the transition compensation, only the amount of the salary will be paid. This still does justice to the intent of the regulation, according to the legislator, because it still prevents cumulation of the continued payment of wages obligation and the transition compensation.

So note that not all of the severance pay paid in each case is eligible for compensation.

Based on the November 8, 2019 Supreme Court ruling, you also only have to pay the transition compensation equal to the amount that would be due the day after the employee has been sick for two years. If the employment was kept dormant for three years after that, no transition compensation needs to be paid for those three years.

Finally, the transitional compensation after January 1, 2020

On January 1, 2020, the new method of calculating the transitional compensation comes into effect, which was also discussed in MIX 2019-5. In cases of long employment, that calculation is often lower. Should you now adhere to the old or the new calculation method?

The UWV has not yet given a definite answer to this question. If the obligation to continue payment of wages after two years of illness ends before January 1, 2020, but the employment contract ends on or after January 1, 2020 (i.e. in the case of dormant employment contracts), the new calculation method of the WAB seems to apply to the compensation scheme. In contrast, the Supreme Court seems to adhere to the calculation method that applied on the day after the employee had been sick for two years, i.e., the old calculation method. To avoid missing out on part of the compensation, I recommend that, as far as possible, the employment contract be terminated before January 1, 2020.

Resume

As a DIY retailer with long-term sick employees, you are now almost always obliged to accept the employee's proposal to terminate the employment contract and pay the often costly transition fee. Note: if the employee does not make a proposal, the employment contract can remain dormant. The transition fee is then, under certain conditions, eligible for compensation. However, the question may then be whether the entire severance pay will be eligible for compensation if the employee still makes that proposal in 2020. It is advisable to seek proper advice on this.