Since the entry into effect of the Wwz, an employer who terminates an employment contract owes the employee, in principle, a transition compensation. However, it is sometimes unclear to the parties, which (wage) components do and do not count towards the calculation of this compensation.
Legal framework
The legislator opted for a strict wording when it comes to which wage components are part of the transition compensation. The Decision on wage definition compensation notice period and transition compensation (“Besluit loonbegrip vergoeding aanzegtermijn en transitievergoeding”) and the Regulation on wage components and working hours (“Regeling looncomponenten en arbeidsduur”) regulate which wage components are included in the calculation of the transition compensation.
According to the Decision, the monthly salary should be increased by wage components to which the employee would have been entitled if the employment contract had continued.
This comes down to the following: monthly salary plus holiday allowance and fixed end-of-year benefits (e.g. a 13th month) + fixed wage components + variable wage components.
Within the meaning of the Decision, wages are understood to be the agreed gross hourly wage, including any collective agreement increases that fall within the term of the employment contract, multiplied by the agreed working hours per month. This refers to that part of the wage that constitutes direct compensation for the work to be performed on the basis of the employment contract, plus 1/12th part of the holiday allowance and the fixed end-of-year benefit.
If the employee receives less pay because he is ill, the wage to which the employee would have been entitled if he were not unfit for work should be taken as a basis. The wage is increased by the fixed year-end benefit if a fixed amount or percentage of year-end benefit has been agreed. If this is not fixed in advance, the end-of-year bonus constitutes a variable wage component.
The Regulation designates the wage components to be included in the calculation of the transition compensation. The Regulation determines exhaustively which wage components qualify as fixed and variable. Wage components not designated as such are not included in the calculation.
What are fixed wage components?
Designated as fixed wage components are (a) overtime pay and (b) shift compensation. These are the agreed fixed wage components that were due in the 12 months preceding the year in which the employment contract ends. Those wage components are compounded and then divided by 12.
The Supreme Court ruled in the TIBCO judgment that only in cases where full application of the reference period, as it follows from the statutory regulations, would be unacceptable in the given circumstances according to standards of reasonableness and fairness, the court is free to deviate from the statutory reference period.
As regards overtime compensation, if structural overtime was worked in the period prior to the incapacity and the employee only received a substitute (lower) sickness overtime compensation determined by collective agreement during the period of incapacity, the average overtime compensation in the 12-month period prior to the incapacity should be taken into account.
What are variable wage components?
Designated as variable wage components are (a) bonuses, (b) profit distributions and (c) year-end benefits. Variable wage components are wage components whose amount is determined by the employee's performance or the company's results, or a combination of both. The amount is therefore not fixed in advance.
These are the agreed variable wage components from the last three years preceding the year in which the employment contract ended. That amount must then be divided by 36. In the event that a bonus has not been agreed, i.e. the payment is not part of the fixed terms of employment and the employer can therefore independently determine whether a bonus is granted in a given year, the bonus payment is not included in the calculation of the transitional allowance.
Other allowances
Despite the fact that the wage components eligible for the calculation of the transitional allowance are limitatively designated in the Regulations, there may be room to include a certain allowance or benefit under circumstances. Indeed, the explanatory notes to the Regulations show that it is not the designation of the wage component that is decisive, but whether the wage component materially characterises itself as one of the designated wage components.
The actual compensation must then be direct remuneration for the performance of the contracted work. Thus, a monthly expense allowance that exceeds the actual costs does not materially qualify as an expense allowance but as (disguised) pay.
In addition, only those components that have been agreed upon should be included in the calculation. Therefore, wage components that are granted but not agreed upon do not count. The employer's share of pension contribution, company car, expense allowances and the employer's health insurance contribution are also not included.
Case law
Various wage components have already been ruled on in the lower courts. For example, a personal allowance granted to the employee, which was also paid to the employee during the period of incapacity for work, is considered a fixed wage component. A holiday compensation, irregularity allowance and flight hour allowance qualify as (a special form of) an overtime allowance. An individual choice budget should also be included, as it is not required that wage components are paid in cash.
Conclusion
Although the basic formula for calculating the transitional compensation is relatively simple, quite a few discussions can arise about which wage components should and should not be included when determining the salary that serves as the basis for calculating the transitional compensation. The employment lawyers at SPEE advocaten & mediation will of course be happy to assist you in such cases.