On May 28, 2019 the Dutch Senate adopted new legislation, the Labor Market in Balance Act (the "Act",Wet arbeidsmarkt in balans), that will go into effect on 1 January 2020. The Act offers opportunities for employers as well, so please take a moment to read the below and don’t let them go to waste.
The Act aims to reduce the gap in legal protection and monetary differences between employees with fixed-term or indefinite-term employment contracts and also repairs (some of) the effects of the changes that were introduced in 2015 (by means Dutch Work and Security Act) and have been causing relentless criticism ever since. The changes in 2015 were the first drastic changes to our dismissal laws since the end of World War II (1945) and changed the labor law landscape profoundly. The changes were intended to make dismissal laws “simpler, less costly for employers and to create more legal fairness for employees”. Very soon after the implementation however it appeared that the changes achieved the opposite. Dismissal laws became more complicated, more time consuming and more expensive for employers.
The pressure was on the legislator to come with proposals to mitigate these undesirable consequences. Now only five years after the significant changes in 2015, employment laws in the Netherlands are undergoing additional changes.
In short the Act introduces a new justified termination ground, changes in statutory transition fee and extension of the duration of fixed-term contracts to 36 months (note that this is a re-introduction of the legislation that applied until 2015) amongst other legal protections.
With these changes the Dutch government intends to encourage employers to offer longer-term or permanent employment agreements instead of fixed term contracts for relatively short periods of time.
Know what to expect and what you can already do to prepare for 2020
The anticipated changes will affect the hiring process, the (cost effective) allocation of flex-workers, the content of contract templates, the process of extension of fixed term contracts as well as the file building process during employment and consequences in case of forced terminations.
All companies that:
- employ staff or hire flex-workers (through payroll agencies, on fixed term employment contracts or on-call contracts);
- use standard/template severance calculation tools;
- have a company social plan that arranges for severance;
- are planning to renegotiate their social plans, collective bargaining agreements with works councils or trade unions;
- deal with negotiations in individual dismissal cases;
- have dismissed employees after the maximum 104 weeks of continuous illness since 2015 or intend to dismiss them after 104 weeks illness in the future;
will need to consider the impact of the Act on their organizations and should take measures to ensure proper implementation and compliance.
- (i-ground) A New Termination Ground
Dutch dismissal law is renowned for a high degree of employee protection. Employment contracts can only be validly terminated by:
- mutual consent (deemed voluntary)
- resignation (deemed voluntary)
- notice of termination with the employee’s consent (deemed voluntary)
- notice of termination (involuntary dismissal; note that employers must obtain prior approval from the governmental agency UWV before giving notice that will lead to valid dismissal)
- court rescission (involuntary dismissal)
The Dutch Civil Code lists eight statutory reasonable grounds for dismissal (the so-called a-h grounds):
a: redundancy due to shut down of the company or restructuring/re-organization
b: long term illness (104 weeks);
c: regular inability to perform the agreed work due to illness;
d: employees incapability/lack of competence to perform the agreed work for another reason than illness;
e: culpable behavior of the employee;
f: employee refusing to perform the agreed work due to serious conscientious objections;
g: work related conflict between the employer and employee;
h: other circumstances that are out of scope of the above grounds but are of such nature that the employer cannot reasonably be expected to prolong the employment contract.
In case of an involuntary dismissal due to a reason related to the employee (grounds c-h), and under the current legislation, a court can only terminate an employment agreement if at least one of the c - h grounds is fulfilled. If a dismissal ground is fulfilled, the employee is entitled to a statutory transition fee (“transitievergoeding”). From available case law it has appeared that fulfilling these grounds is not easy and is experienced as burdensome by employers in terms of lack of flexibility, the high costs of file building and litigation is time-consuming and costly too. The legislator now introduces one additional ground that allows employers to combine facts and circumstances that on their own or combined do not fulfill any of the c - h grounds, but still present a compelling case that justifies dismissal. This additional dismissal ground is referred to as the “i-ground” or “the accumulation ground”. This improvement however comes at a price. If the court terminates the employment contract based on the i-ground, the court is allowed to grant the employee an additional compensation on top of the transition fee, up to a maximum of half the amount of the transition fee. Furthermore the court can also award a so-called ‘ reasonable compensation’ if it rules that the employer acted seriously culpable towards the employee. This ‘reasonable compensation’ is by nature subjective in the sense that a court assesses the overall facts and circumstances and depending on their interpretation thereof they set an amount that is deemed ‘reasonable’. The subjectivity of the outcome in court proceedings results in more settlements being agreed out of court with generally more generous severance amounts. If settlement cannot be reached we see relatively many cases go into appeal and cassation.
The overhaul of dismissal laws back in 2015 is still leaving its marks in labor relations and it will probably take many years before the outcome of employment cases can be predicted with more accuracy. Until then employers will need to continue investing in efficient and accurate file building processes, empowering their HR and legal teams to ensure excellent workforce management while navigating within the legal framework to meet the company’s commercial objectives and educating their managers in the do’s and don’ts in people management to prevent alleged seriously culpable behavior. By doing so employers can create bottom-up and top-down awareness of the legal and thus financial consequences of excellent versus poor people management. The ultimate goal is to ensure that in the event of conflict the company’s legal position is optimized to the fullest extent possible to justify forced dismissals and successfully counter claims of seriously culpable behavior.
- Transitievergoeding – Statutory Severance: The Changes
Severance from First Day of Employment. As per 1 January 2020 employees will be entitled to the statutory transition fee from their first day of employment, including the trial period. Currently, employees are only entitled to the transition fee after two years of employment.
Calculation Formula. The calculation formula for the transition fee will change: one-third of a monthly gross salary for each full year of service and pro rata for each month or day of service, regardless of the age or years of service of the employee. The differentiation between the first 10 years of employment (one third of monthly salary) and the period afterwards (half of monthly salary) disappears.
50+ years no Exemption. As per 1 January 2020 the temporary facility for employees of 50 years or older entitling them to a higher compensation will no longer apply.
Reimbursement for the Employer. Effective 2020 the compensation scheme for the transition fee in the event of dismissal due to long-term illness/incapacity for work will apply. In the Netherlands the employer must continue salary payments during a maximum of 104 weeks. If the employer has met all obligations during sick-leave, the employment agreement can be terminated after 104 weeks upon approval of the Employee Insurance Administration Agency (UWV) (dismissal ground b). Upon dismissal the employee is entitled to receive the transition fee within a month after termination. As of 1 April 2020 employers can apply to the UWV for compensation / reimbursement in respect of the transition fee that they paid since 1 July 2015 or will pay in the future. It is important that your company keeps an overview of any transition fees paid to employees after two or more years of sick leave since 1 July 2015. Requests for reimbursements can be submitted as per 1 April 2020 but ultimately within 6 months after that date. Reimbursement requests that are not made timely will be rejected.
- The Chain of Successive Fixed-term Employment Contracts: back to 36 months
In 2015 the contractual sequence of fixed term contracts was limited from “3x3x3” to “3x2x6”. Consequently employers were allowed to enter into a maximum of 3 consecutive fixed term contracts within a period of 24 months with maximum interruptions of 6 months between the contracts. If parties enter into another (fourth) contract or the period of 24 months has been exceeded, an indefinite term contract is deemed to exist by operation of law.
As per 2020 employers will be allowed to conclude 3 fixed term contracts in 36 months. The maximum interruption will remain 6 months. The 36 months period will also be applicable to current fixed term employment contracts provided that these survive until or after 1 January 2020. After 36 months or if a fourth fixed-term employment contract is agreed, the employment contract is converted into an indefinite term contract. In short:
Until 2015: 3 x 3 x 3
3 employment contracts
3 years (36 months)
3 months intervals
Current rule: 3 x 2 x 6
3 employment contracts
2 years (24 months)
6 months intervals
As per 1 January 2020 : 3 x 3 x 6
3 employment contracts
3 years (36 months)
6 months intervals
- Zero-hours or On-Call Employment Contracts
Timely Call of Duty. Under current law the time between the moment that an employer calls the on-call employee for work and the moment when the employee must report to work is not regulated. As per 2020 employers must observe at least four days advance notice as to when the employee is expected at work. The on-call employee will remain entitled to the agreed wage if the work is cancelled within those four days.
Deviation by CLA. For employers who are subject to a collective labor agreement that is agreed with the trade unions, they have the option to reduce the notice to 24 hours in agreement with the trade unions.
Accrued Hours Rights. The on-call employee who has been engaged/contracted by the company for 12 months is entitled to be offered ‘guaranteed working hours’. The guaranteed working hours must be based on the average number of hours that the on-call employee effectively worked in the preceding 12 months. In case the employer does not offer the guaranteed working hours, the employee is still entitled to wages according to these guaranteed working hours.
- Equality for Payroll Employees
Payrolling has been a form of employment where companies would hire workers from a third party (the payroll company). The payroll company had no other activities than having employees on its payroll to be posted at their customers (the principal). The payroll company assumed all employer’s risks and obligations. This form of labor allocation catered to companies’ needs to eliminate employers’ liabilities and reduce operational and overhead costs and their need for a flexible workforce. The differences in remuneration and benefits created the business case for some if not many payroll companies to offer their services at commercially attractive fees. These practices couldn’t count on much support from the trade unions and the legislator. The main concern related to the remuneration levels, as payroll employees generally received lower remuneration and lesser employment benefits than the employees of the companies where they are posted.
As per 2020 payroll employees will be entitled to the same remuneration and benefits as the employees of the company where they are posted. Furthermore they will also be entitled to an "adequate" pension plan. It is likely that these changes in legislation will increase the cost of payroll employees. The changes will not apply to temporary workers and seconded employees.
- Lower Unemployment Insurance Contributions
Unemployment Insurance Contributions. In the legislator’s quest to promote indefinite term employment, as per 2020 social security insurance contributions for unemployment are no longer differentiated depending on the sector categories to which a company is allocated. Instead, unemployment insurance contributions for employees on an indefinite term employment agreement will be lower than contributions for employees on a fixed-term contract, with the exception of on-call employment contracts and employees who are younger than 21 and work for less than 12 hours per week.
Pay Stub Requirements. As from 2020, the pay stub must mention whether the employee is employed on a fixed-term or an indefinite term employment agreement. If the employer applies the lower unemployment insurance premium, a copy of the indefinite term employment agreement must be kept on file in the salary administration. This allows the Tax Authorities to verify if the employer has correctly applied the lower unemployment insurance premium.
Increased Premiums. The employer must adjust the lower unemployment insurance premium to the higher unemployment insurance premium:
- when the employment contract is terminated within 5 months after the commencement date;
- in the event that the employer pays more than 30% of the contractually agreed working hours in a calendar year. This rule aims to prevent abuse by employers who would deliberately agree to a low number of working hours.
The upward adjustment in unemployment insurance premiums has retroactive effect.
These changes will generally be implemented by the payroll company effective 2020. We note that the percentage of unemployment premiums for 2020 will not be determined earlier than at the end of 2019. The government indicated a lower insurance premium of 2.78% and a higher unemployment insurance premium of 7.78%
- Sector classification will remain in place
The premiums for the ‘Work Resumption Fund’(Werkhervattingskas) consists of the charges relating to two components: (i) the insurance for partially incapacitated employees (Regeling werkhervatting gedeeltelijk arbeidsgeschikten); and (ii) the Sickness benefits. For small and medium-sized employers, both components are (partly) determined on the basis of sectoral components. The sectoral classification remains in place for these sectoral components.
Temporary Employment Agencies. Since May 18, 2017 it was no longer possible for temporary employment agencies (uitzendbedrijven) to be classified in a professional sector. Due to transitional law, temporary employment agencies that were already classified at the time were allowed to stay in the classified sector. As from 2020 the transitional law will no longer apply and all temporary employment agencies will be classified in the ‘temporary employment sector’. Payroll companies are no longer classified in the temporary employment sector but in sector 45 (business services). A split allocation (gesplitste aansluiting) may apply if the payroll company also assigns (uitzenden) its employees.
An exception continues to apply for limited liability legal entities (besloten vennootschappen) that serve as personnel companies: these companies are classified in the sector to which the actual work/duties of the employees in the personnel company is allocated.
- The self-employed worker – Stay Tuned: more changes to come
The government is currently preparing new legislation aimed to offer a legal and tax framework for self-employed workers. More clarity on the measures is expected before the summer 2019. In addition, the government has installed a committee that is asked to give advice on the regulation of new forms of labor, such as self-employed workers and digital platform workers. This advice is expected to be published in November 2019.
Please do not hesitate to contact us if you have any queries.
On behalf of the Team
Rachida el Johari and Madeleine Molster