Calculation of transitional allowance at the end of a dormant employment contract

Court of Appeal in Den Bosch provides clarity: is there a 'Xella case' or not?

Case law regularly deals with the subject of terminating a dormant employment contract case of long-term illness. This week, we will answer the question: should the calculation of the transitional compensation be based on the moment the employer's obligation to continue to pay wages has ended, or on the moment of actual termination of the employment contract? There can be quite some time in between.

The facts

The case concerns a production employee who was employed from 1 September 1989 until 31 July 2020. He became unfit for work on 11 May 2014 and was no longer able to perform his own work (or adjusted work) from that moment onwards. On 8 May 2016, the employee was awarded a WIA benefit (i.e. sickness benefits under Dutch law).

On 12 April 2019, the employee asked the employer whether she could agree to the end of the employment contract, but the parties could not come to an agreement. On 31 December 2019, the employer therefore requested permission from the UWV to terminate the employment contract due to long-term illness. On 27 January 2020, the UWV granted this permission.

The employer finally terminated the employment contract on 11 January 2020, with effect from 1 August 2020. Subsequently, on 10 March 2020, the employee claimed the transitional allowance of €74,894 gross. The employer did not go along with this and paid out only € 47,817 gross in transitional compensation on 1 September 2020, which is considerably less.

This prompted the employee to go to court and to claim payment of the remaining sum of € 27,077 gross.

From a legal point of view, the question is: should the calculation of the amount of the transitional allowance be based on (1) the day after that on which the employer's obligation to continue to pay wages expired (May 2016) or (2) the day after that on which the employment contract was ultimately terminated (August 2020)?

In the first instance, the subdistrict court ruled in favour of the employee and ordered the employer to pay an additional € 27,077 gross. However, the employer lodged an appeal with the Court of Appeal in Den Bosch.

Judgment on appeal

On appeal, the employer argued that the date on which the waiting period for WIA benefit ended should be taken as the basis for calculating the transitional allowance. In this respect, the employer appealed to the so-called Xella judgment.

In the Xella case, the Dutch Supreme Court ruled (at the end of 2019) that an employer, based on good employment practice under Section 7:611 of the Dutch Civil Code, is in principle obliged, in the event of long-term illness, to agree to an employee's termination proposal, in order to achieve a mutually agreed termination with the granting of the statutory transitional compensation. A sick employee must therefore be able to terminate a dormant employment contract. Under the Transition Compensation Act, employers may then be compensated by the UWV for the transitional compensation they must pay to the sick employee.

But: according to the Den Bosch Court of Appeal, this case does not involve a situation such as the one in the Xella judgment. After all, the employer in this case did not agree to the employee's proposal, which was in line with the principles of the Supreme Court in the Xella case. Therefore, there was no termination by mutual consent, but a one-sided termination of of the employment contract by the employer, by 1 August 2020.

Article 7:673 paragraph 1 of the Dutch Civil Code stipulates that the employer owes the employee a transitional allowance if the employment contract has been terminated by the employer. This also applies if the contract has been terminated due to long-term illness of the employee.

Subsection 2 of Section 7:673 BW then stipulates that the amount of the transitional compensation is calculated on the basis of the number of years the employment contract has lasted. In short: when calculating the transitional compensation as a result of the termination, the period that the employment contract has continued (hence in this case until 1 August 2020) should be taken into account.

According to the Court of Appeal, a (reasonable) interpretation of the law does not imply that the calculation of the amount of the transitional compensation should be based on a different moment in time (i.e. the moment when the waiting period for the WIA benefit has expired).
In short: the employer should pay the full transitional allowance, calculated over the period 1 September 1989 to 1 August 2020. The fact that the employer (possibly) has to pay part of that transitional allowance itself without receiving compensation from the UWV is at the employer's risk and expense.

If you want to read the full judgement, you can do so here.

In sum

Issues concerning illness, reintegration, termination of the employment contract in the event of long-term illness and the transitional allowance continue to lead to interesting case law. Employers and employees would both do well to obtain timely information on all possible pitfalls. The employment lawyers at SPEE advocaten & mediation will be happy to help you on your way!

SPEE advocaten & mediation Maastricht