In addition, the government believes that employers themselves are responsible for business risks, such as long-term illness among employees, and should set aside financial reserves to cover these. This consideration outweighs the continuation of the compensation scheme.
Implications for employers
The abolition of both compensation schemes means that employers will no longer be eligible for transition payment compensation when they terminate an employment agreement following long-term incapacity for work or upon business closure due to the employer’s retirement or death. Consequently, these dismissal costs will henceforth be borne entirely by employers themselves.
Implications for employees
The memorandum emphasises that the abolition applies solely to the compensation for employers; it does not affect employees’ entitlement to transition payments. Employees will thus remain entitled to transition payments in the event of dismissal due to long-term illness or business closure due to the employer’s retirement.
That said, indirect effects are acknowledged. As employers will no longer be compensated, they may have an incentive not to terminate employment agreements with employees who are medically incapacitated for work once the obligation to continue paying their wages has ended. This could lead to an increase in dormant employment, where the employment agreement formally continues. In such cases, no work is performed and no wages are paid, and no transition payment becomes due as long as the employment is not terminated.
The government considers it difficult to predict the extent to which the number of dormant employment relationships will increase following the abolition. In this regard, the responsibility for determining whether termination of the employment agreement is desirable lies primarily with the employer and the employee. The court remains the final arbiter of what may be expected from an employer in line with good employership. Against that background, the Supreme Court’s judgment in Xella (in Dutch) is relevant. The Court held – partly on the basis of the existing compensation option – that an employer must in principle cooperate in terminating a dormant employment agreement, granting a transition payment in the process. The government notes that the forthcoming abolition of the compensation is expected to affect the scope and interpretation of this standard in case law.
Transitional law and entry into force
If the bill is passed by both the Dutch House of Representatives and the Dutch Senate, the Act is intended to come into force on 1 January 2027. To ensure smooth implementation, the bill provides for transitional law for ongoing cases.
For employees who are long-term medically incapacitated for work, the old scheme will continue to apply if the two-year period of incapacity for work expires before 1 January 2027. In such cases, the employer will still be entitled to compensation from the UWV. If the employee has been incapacitated for less than two years on the date of entry into force, the new regime will apply and the right to compensation will lapse.
For small employers who cease trading due to retirement or death, the transitional law stipulates that the right to compensation will be retained under certain circumstances. Specifically, this is the case if the first request for permission made to the UWV or the first dissolution request made to the Subdistrict Court, which resulted in permission or dissolution, was submitted before 1 January 2027. This also applies to subsequent termination requests for other employees, provided they form part of the same business closure.
Houthoff’s Employment & Pensions Team has extensive experience advising on all employment law aspects of long-term incapacity for work, including employment agreement termination, transition payments and dormant employment. We are closely monitoring developments in this area and would be pleased to advise you on the implications for your organisation.