Terminating a contract efficiently

Martin
Beijneveld of Dutch law firm Van Harmelen Beijneveld Tubbergen Van Houten,
looks at the options for executing lawful dismissal under the labour law of the
Netherlands and how the courts can speed up the process of contract termination

Under
the labour law of the Netherlands an employer wishing to terminate the
employment of an employee invariably faces the problem that he cannot predict
with absolute certainty a) whether the employment can be terminated at all b)
how much time that will take and c) how much it will cost.

Cantonal
court circle

Whether
an employer can terminate an employee’s employment, and if so, the notice
period he has to give not only depends on his own will, but also on the
personal circumstances of the employee. The extent to which the employer is
liable to make severance payments is a matter for negotiation between the
parties or for resolution by the court.

No
fixed rules of law existed to help determine this matter until 1 January 1997,
when one national formula was introduced by the Cantonal Court Circle, of which
all of the 160+ Cantonal Court Judges are members. This formula is explained
further below.

Method
of termination

Termination
of an employment agreement is only possible a) by mutual agreement between the
employer and the employee b) by notice of termination by the employer to the
employee (i) on the basis of a “dismissal license” granted by the director of
the Regional Labour Office and (ii) with due observance of the relevant notice
period c) by a “rescission” of the employment agree- ment by the Cantonal Court
or d) by a combination of (a) and (b) or of alternatives (a) and (c).

Regional
labour office

The
need to acquire a dismissal licence is not dependant upon the applicability of
Dutch law. An artificial standard is applied, which is whether the Dutch labour
market, in the widest sense, is involved – if it is, a dismissal licence will
be required.

A
decision cannot usually be expected for two to three months. The period of
notice an employer must observe is set out in the legislation. The dismissal
licence is irrevocable. The director of the Regional Labour Office does not
have authority to grant any compensation payable by the employer.

Cantonal
court

Rescission
of an employment agreement by the Cantonal Court is initiated by the employer
filing a petition to this effect. The grounds for such a petition are: a)
behaviour which warrants termination of employment with immediate effect for an
urgent reason or b) “changed circumstances of such nature that the employment
agreement should reasonably come to an end immediately or within a short period
of time”. The phrase “changed circumstances” is assumed to be broad enough to
cover all the conceivable grounds for which an employer might wish to terminate
the employment relationship.

A
Cantonal Court may reject a petition for lack of evidence or because it finds
that a termination is not reasonable under the given circumstances, but
petitions are rarely rejected solely on the technical ground that the facts
submitted do not constitute “changed circumstances”.

There
is an oral hearing of the case, and the procedure seldom takes more than six
weeks. When considering the grounds under which the employment agreement can be
rescinded, the Cantonal Court may determine that the petition will be granted
on the condition that the employer pays some compensation.

The
employer is normally allowed a period of two weeks to withdraw the petition if
he considers the amount too high, in which case employment continues. Decisions
of the Cantonal Courts on petitions for rescission cannot be appealed against,
except on formal grounds (outside the scope of this article).

To
overcome the problem that the employee who has agreed to the termination of his
employment forfeits his entitlement to receive unemployment benefits, it is
possible to achieve almost the same result with different type of agreement.
Under pro forma rescission, the employee promises not to dispute the facts
submitted by the employer in his petition for rescission, and as consideration
for that promise, is granted a certain amount of compensation.

The
practice is generally accepted by the Cantonal Courts and by the authorities in
charge of social security legislation. An employer often agrees to pay the
employee a certain amount of additional compensation to avoid litigation, as
this action could help make the outcome of a decision for rescission less
unpredictable.

Cantonal
court formula

An
advantage of the Cantonal Court formula is that the amount of compensation to
be granted by the Cantonal Court is easier to predict. By introducing a
national formula, the Cantonal Courts have tried to create a more uniform
jurisdiction. The amount of compensation is based on the following formula: one
month’s salary for each year of service up to the age of 40; one-and-a-half
months’ salary for each year of service between the age of 40 and 50; and two
months’ salary for every year of service after the age of 50.

The
number of years of service are rounded up if the employee has worked for more
than six months on the date of rescission. In addition, the Cantonal Courts
will also include any “fixed and agreed” wage components, such as holiday
allowances, fixed 13th-month bonuses, fixed bonuses for shift working and
structural allowances for overtime.

Save
in exceptional cases, the Cantonal Courts are advised not to include items such
as non-contractual profit shares, employer’s contributions to pension premiums
and/or health insurance, company cars and expenses allowances.

Apart
from the years of service and the fixed and agreed wage components, the
Cantonal Court formula also includes a third multiplying factor – the
“adjustment factor”. This means the Cantonal Court considers the special
circumstances of the case. In a pro forma or “neutral” rescission – one in
which there are no special circumstances justifying a deviation from normal
practice – the adjustment factor will be one.

Should
the Cantonal Court decide, however, that special circumstances exist which
justify an adjustment of the compensation calculated, this will be reflected in
the adjustment factor.

By
applying this adjustment factor, the Cantonal Courts will still have the
discretionary power to determine what figure amounts to a reasonable sum of
compensation in the circumstances. The Cantonal Court formula recommends that the
amount of compensation does not exceed the expected loss of income to be
suffered until pensionable age.

The
major advantage of a rescission by the Cantonal Court is that the parties have
certainty about their position within a short period (about one-and-a-half to
two months maximum). No appeal is possible, save in exceptional cases. If an
employee is ill, a petition for rescission will not be accepted unless certain
requirements are met.

Social
plan

More
recently, the Cantonal Court Circle introduced some additional recommendations.
One of these is that a Social Plan, which is designed to accommodate employees
whose jobs are affected by a restructuring (“collective dismissal”), carries
more weight when it has been agreed upon between the employer and the labour
unions (and preferably the works council).

Redundancy
payments under a Social Plan depend on the employee’s age, duration of service,
position and potential for finding another suitable job. If an individual
employee has been given notice by using the dismissal licence granted by the
director of the Regional Labour Office, he may negotiate a severance payment on
the strength of his potential claim for “obviously un- reasonable” dismissal.

In
most cases an obviously unreasonable dismissal will be deemed to have occurred
if, when balancing the financial provisions made for the employee and his
prospect of finding suitable alternative employment, against the interests of
the employer, the hardship endured by the employee is disproportionate to the employer’s
need to protect his business interests.

Claims
for obviously unreasonable dismissal when brought by employees are, in general,
not easily won. The fact that a Social Plan has been established and agreed
upon with the labour unions acts in the employers’ favour.

The
Cantonal Courts will usually follow the Social Plan. In circumstances where
only the works council has agreed upon the Social Plan, its status, binding or
not, is less clear in case law.

Best
method of termination

Over
the past few years, there has been a substantial increase in the number of
petitions filed by employers with the Cantonal Courts for rescission of
employment agreements with individual employees.

A
rescission by the Cantonal Court is the most efficient and quickest way of
terminating contracts of employment, taking only one-and-a-half to two months.

Edited
by Clare Murray, employment law partner at Fox Williams and editor of
hrlaw.co.uk, Fox Williams’ online employment law information service

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