In the Netherlands, the government has submitted an Amendment to Bill 36 869, which proposes ending compensation schemes that allow employers to reclaim the statutory transition payment, both for long-term incapacity and business closures.
In 2019, the Dutch Supreme Court ruled (ECLI:NL:HR:2019:1734) that an employer must, in principle, cooperate with the termination of the employment agreement of an employee who has been ill for two years, including payment of the transition payment. This ruling appeared to have largely put an end to the practice of "dormant employment agreements." A key pillar behind that practice was the compensation scheme: employers could reclaim the transition payment from the UWV after payment.
If Amendment to Bill 36 869 is passed, compensation will disappear, and dormant employment agreements could return when the draft legislation goes into force on 1 January 2027.
Timeline and transition
In 2026, upon termination following two years of illness, employers can still apply for compensation from the UWV, generally within six months of full payment of the transition payment.
If the bill is adopted, however, the compensation schemes will expire as of 1 January 2027. Termination will then become more costly, and keeping the contract dormant will carry its own legal risks. The Amendment includes transitional provisions for cases already in progress or initiated in a timely manner, but after entering into force on 1 January 2027, the starting point will be clear and no further compensation will be granted.
Legal uncertainties
The government expressly leaves it to the courts to determine what obligations the duty of being a good employer will involve. That choice raises several questions. First, it is unclear to what extent the standard in the 2019 ruling will continue to apply in full after the removal of the compensation scheme. In the 2019 ruling, the Supreme Court explicitly held that the employer has "in principle" no reasonable interest in maintaining the employment agreement, partly because the transition payment could be reclaimed through the UWV. Once that financial safety net is removed, an employer may arguably have a legitimate interest in postponing termination - but whether the courts will accept that argument remains uncertain.
The Council for the Judiciary expects this lack of clarity to lead to an increase in litigation.
In addition, it has not yet been definitively decided whether holiday leave continues to build up during a dormant employment agreement. If so, a prolonged dormant employment agreement could give rise to a substantial obligation to pay out unused holiday leave, on top of any transition payment upon eventual termination. For employees, the right to a transition payment upon dismissal remains unchanged. The bill proposes to remove only the compensation for employers. The employee therefore retains their full entitlement, which affects the bargaining position upon termination.
Looking ahead: reform of the transition payment
The government is also working on a proposal for a broader reform of the transition payment with a greater focus on "job-to-job" transitions. The government coalition agreement announced that employers who invest in training or reskilling in a timely and verifiable manner and fully commit to reintegration may face a reduced or no obligation to pay the new transition payment. The precise details will follow in separate legislation, but these regulations are not expected to enter into force at the same time as the proposed removal of the compensation scheme.
In closing
If the proposal is adopted, the compensation schemes for long-term incapacity for work and business closure will be discontinued as of 1 January 2027. The decision to terminate an employment agreement or to keep it dormant (temporarily) will therefore become more strategic and more risk sensitive.
For more information on this draft law and how it could affect your Netherlands-based business, contact your CMS client partner or the CMS experts who wrote this article.
