How to conclude a settlement agreement to terminate an employment agreement?

One of the characteristics of the Dutch employment law is the so-called closed system of dismissals. This means that terminating an employment agreement (by the employer) can only take place through the statutorily designated routes for dismissal. Via a termination or settlement agreement, one of such routes, the employer can terminate the employment agreement with an employee in mutual consultation and without the interference of a court or government authority. A termination or settlement agreement is used very often in the Netherlands and can be used in a variety of situations. This blog provides a brief guide to terminating an employment agreement through a settlement agreement. 

  1. What is a settlement agreement?

A settlement agreement can be used in order to terminate an employment agreement. As stated above, the dismissal system in the Netherlands is rather complicated and sometimes referred to as a ‘closed’ system. The settlement agreement is signed by both employer and employee after negotiating on the terms and conditions and its effect is that the employment agreement is terminated with mutual consent (wederzijds goedvinden). 

Note: a settlement agreement is only valid if put in writing and signed by both employer and employee. 

  1. How does the concluding of a settlement agreement work?

Since a settlement is the result of a negotiation process between two parties, it is strongly advised to prepare diligently before entering into that negotiation. Depending on the reason for terminating the contract, digging up the file and reading into the employee’s history and context can be a good start. Putting oneself in the other party’s shoes and considering what would make a good settlement offer can be a helpful step in determining whether the proposal to be made is acceptable and reasonable.

Both parties can seek legal advice to help putting together a decent proposal and / or reviewing a proposal that was made by the employee. Today, more and more negotiations take place at the mediation table (with assistance of legal advisors or without). A mediator is impartial and usually a good help in getting a mutually agreeable outcome of the negotiations (faster).

After signing,the employee has fourteen days to cancel the settlement agreement in writing (= ‘cooling off period’, = wettelijke afkoelingsperiode). An employer cannot exclude or limit this right of the employee in any way. If the employee agrees and (s)he does not cancel the settlement agreement within the designated cooling off period, the employment agreement will end at the designated end date.

  1. Advantages of a settlement agreement

The closed system of dismissal means that routes for dismissal  are limited to those mentioned in the Dutch Civil Code: 

1) expiry of a fixed-term contract

2) mutual agreement by the parties to terminate via a settlement agreement

3) termination of the employment agreement by the employer

4) dissolution of the employment agreement by the court. 

Ending an employment agreement via a settlement agreement has some advantages. Other than some of the alternatives (routes 3 and 4 above) require intervention of a third party (UWV or Court) which enhances insecurity about the outcome. Also, procedures requiring third parties usually take (much) more time compared to terminating the contract via a settlement agreement – an advantage for both parties. 

Normally, upon signing a termination agreement, the employee is still entitled to unemployment benefits (WW). In a settlement agreement, parties can arrange the termination in more details, for example by adding provisions  as exemption from duties until the end date or the non-compete clause. 

It is not uncommon to financially compensate the employee when he or she signs the settlement agreement, however, it really depends on the circumstances what is reasonable and what would be a realistic outcome of negotiations. Payment of a severance payment or transition fee is not obliged – though it may very well be inevitable. It may help preventing procedures at the UWV or cantonal judge. Please note that this may depend on the nature of the case. 

  1. Essentials of a settlement agreement

In a settlement agreement, some specific essential subjects have to be arranged. These are, inter alia the following:

  • The applicable notice period and end date of the employment agreement*;
  • Arrangements on salary until the end date and a possible severance payment;
  • Employment until the end date;
  • Covering of legal expenses that the employee has to make (or not);
  • Arrangements on handing in any company property;
  • Exemption or confirmation of a non-competition and secrecy clause;
  • How the departure of an employee is communicated to the colleagues;
  • The applicable law.

* Always keep the statutory or contractual notice period in mind. Antedating is never a good idea. 

  1. 3 tips

As the contents of a settlement agreement are mostly defined by what the outcome of negotiations is, as an employer, it may help to provide an the employee an incentive to be willing to enter into a settlement agreement. Examples of incentives: 

  1. An employer may decide to grant the employee a type of financial compensation. For example a severance payment, or a ‘bonus’ amount for signing the agreement. It can also be proposed to increase such compensation if and insofar as the employee does not invoke termination of the termination agreement during the cooling-off period. Please not that one cannot forbid the employee to use the cooling-off period, not even when such is arranged in an agreement. 
  2. An employer could offer to cover the legal assistance expenses that the employee has to make (to a certain amount). Such could be a way to show willingness to come to a proper settlement. This may contribute to a quick termination of the agreement. Also, an employer is legally obliged to make sure that the employee is well aware of the contents of the agreement and its legal consequences. Encouraging an employee to seek legal advice helps covering that point.
  3. In general, it is advisable to keep good relations with the employee during the process that is leading to signing the settlement agreement. A good way to show willingness is to offer that the employee always may get in touch with the employer for questions.

  1. To conclude

A settlement agreement can be a useful way of terminating the employment agreement. We advise you to get in touch with a lawyer from Claws when drafting a settlement agreement, because it is from a legally detailed nature to draft a tailored settlement agreement. 

If you are trying to come to a settlement agreement but facing a deadlock in negotiations, you can contact us for (inter)mediation in this process.

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