Settlement agreement: what is it and what should you pay attention to?

It may happen that your employer wants to terminate the employment relationship and makes you an offer of dismissal. In many cases, this is done through a settlement agreement, also known as a VSO. At such a time, a lot comes at you. What exactly does a settlement agreement mean, what should you pay attention to before agreeing and what rights do you have? On this page, you will find a complete overview of the most important points of interest.

What is a settlement agreement?

A settlement agreement is an agreement in which employer and employee agree together to terminate the employment relationship. This is done by mutual consent. Instead of a dismissal procedure through the UWV or the subdistrict court, both parties themselves agree on the conditions under which the contract ends.

If you want to understand the basics first, check out the meaning of a settlement agreement and dismissal by mutual consent.

In practice, a settlement agreement is not just about the end date. Agreements are usually also made about compensation, the notice period, the final bill, any exemption from work and sometimes guidance to new work. The latter can be done, for example, via a outplacement process.

A VSO can provide peace and clarity, but only if the content is correct. Therefore, never sign a settlement agreement directly without checking exactly what it contains. An incorrect wording can have consequences for your unemployment benefit, your compensation and your legal position.

The legal meaning of a settlement agreement

A settlement agreement has a formal legal basis. That makes it not just an informal proposal, but an agreement with concrete consequences. That's why it's important to understand that every part counts: from the reason for dismissal to the end date and how agreements are formulated.

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“In a settlement agreement, in order to terminate or prevent uncertainty or dispute about what is legally between them, the parties bind themselves to a determination thereof, intended to apply even insofar as it deviates from the pre-existing legal situation.”

Article 900 Civil Code Book 7

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What does a settlement agreement say?

A settlement agreement contains agreements about dismissal and completion of employment. The exact content varies by situation, but the following components usually recur:

• The reason for dismissal
• End date of employment
• Confirmation that the initiative lies with the employer
• The amount of the severance pay
• The notice period or fictitious notice period
• The final bill
• Exemption from work
• Returning business property
• Any agreements about a competition or relationship clause
• The 14-day cooling-off period
• Possible reimbursement of legal costs

The reason for dismissal must be neutral. Think, for example, of reorganization, a losing position or a difference of insight. A neutral formulation is important to prevent problems with the UWV.

The remuneration must also be clearly defined. You can read more about this at compensation under a settlement agreement, VSO and transition payment and transition payment.

In addition, financial completion is important. Think of outstanding vacation days, vacation pay, bonus, commission or a thirteenth month. Closes there final settlement in case of dismissal directly on.

Sometimes an agreement also includes additional terms. Think of dissolution or a reservation. In that case, you can also VSO dissolution and a resolutive condition in a settlement agreement be relevant.

In short: don't just look at the amount. It is precisely the small formulations that determine whether the agreement is beneficial or unfavorable.

What is the difference between a settlement agreement and a termination agreement?

The terms settlement agreement and termination agreement are often used interchangeably. In practice, employers often mean the same thing: an agreement that ends employment without a procedure.

Nevertheless, the term settlement agreement is more legally precise. This term more clearly states that parties make agreements together to settle an existing situation or uncertainty. For you as an employee, this mainly makes a practical difference: you must be able to see exactly what agreements apply to dismissal, compensation, unemployment benefits, notice period and completion.

For many employees, this is primarily a semantic difference, but in terms of content, it is important that a VSO is fully and legally correct.

Settlement agreement in various situations

A settlement agreement can be used in several situations. That does not mean that every situation is the same. It is precisely the context that determines how much risk you run, how strong your negotiating position is and what you need to pay extra attention to.

Settlement agreement in case of illness

In case of illness, you have to be extra careful. In many cases, you have protection against dismissal. If you sign a VSO during such a period, this can have major consequences for your income and your right to benefits.

That is why it is important not only to read this page, but also VSO in case of illness, dismissal during illness and resign during illness.

Settlement agreement in case of reorganization

In case of reorganization or other business reasons, a VSO is often offered. Employers then regularly opt for a mutually agreed arrangement instead of a formal dismissal procedure.

If you want to better understand what that means in your situation, then staff reorganization, dismissal due to reorganization and VSO for business reasons logical next steps.

Settlement agreement in case of redundancy or position expires

If you are declared redundant or your position expires, departure is also often arranged by agreement. Then it helps to look at your situation in conjunction with declared redundant and what if your position expires.

What are the advantages and disadvantages of a settlement agreement?

A settlement agreement can offer benefits, but only if the content is properly arranged. Many employees mainly look at speed and compensation. However, the real quality is often in the conditions.

Benefits of a settlement agreement

A VSO can have advantages such as:

• Fast clarity without a lengthy procedure
• More space for customized agreements
• An opportunity to negotiate a better arrangement
• Quieter farewell without a formal trial
• Agreements about guidance to new work

This guidance can, for example, consist of an outplacement process at a VSO, general outplacement whether career guidance.

Disadvantages of a settlement agreement

A VSO also has risks:

• You can agree to unfavorable terms too quickly
• An incorrectly worded VSO can have consequences for your unemployment benefits
• The compensation is not automatically as high as possible
• Agreements may be unclear or lead to discussion later
• In case of illness or pressure from the employer, drawing can be extra risky

For more depth, you can also the disadvantages of a settlement agreement view.

What compensation do you receive in a settlement agreement?

With a settlement agreement, you usually receive severance pay. The amount of that compensation depends on several factors: your salary, your years of service, the reason for dismissal and your negotiating position.

We often look at the transition payment as a basis. If you want to better understand how it is calculated, take a look at calculate the transition payment and calculate severance pay in a settlement agreement.

It is important that a VSO allowance does not automatically have to be the same as the transition payment. Sometimes there is room for higher compensation, especially if the employer is not legally strong or wants to get rid of the situation quickly. That is why they are also dismissal and transition payment, VSO and transition payment and compensation under a settlement agreement relevant.

In addition, you can sometimes negotiate additional terms, such as:

• Exemption from work with pay
• Reimbursement of legal costs
• A positive testimonial
• A separate budget for guidance
• One outplacement fee

Those who want to negotiate more strongly would do well, too. negotiating a VSO and negotiate a settlement agreement to read.

Settlement agreement and WW

For many employees, this is one of the most important questions: will I be entitled to unemployment benefits if I sign a settlement agreement?

That depends a lot on the wording of the agreement. The VSO must make it clear that:

• The initiative for dismissal lies with the employer
• The reason for dismissal is neutral
• There is no immediate dismissal
• There is no culpable behavior
• The end date matches the correct notice period

If these points are missing or misworded, the UWV can refuse or postpone your benefit. If you want to dive deeper into that, read WW rights under a settlement agreement.

Final discharge and final settlement in a settlement agreement

A settlement agreement is not just about the end date and the compensation. The completion of all outstanding obligations is also important.

The final bill may consist of outstanding vacation days, vacation allowance, bonus, commission or other financial rights. You can find out more about this at final settlement in case of dismissal.

In addition, the term final discharge often comes back. In doing so, the employer and employee declare that they have nothing to claim from each other after execution of the agreements. It is precisely that part that must be carefully formulated so that there is no discussion about money, rights or obligations later.

Notice period in the event of a settlement agreement

Even though there is no ordinary termination with a VSO, the notice period is still very important. This is because the UWV looks at the fictitious notice period. As long as it's still running, your unemployment benefits usually won't start yet.

That is why it is important to clearly understand how the notice period with a VSO, the fictitious notice period in a settlement agreement and the general rules about the notice period in the case of a permanent contract work.

If the employer wants the contract to end earlier than is convenient for you, you can try to negotiate a higher compensation as compensation.

Can I ask my employer for a settlement agreement?

That is possible, but it is often less beneficial than when the initiative lies with the employer. If you ask for a VSO yourself, this may affect your unemployment rights and the employer's willingness to pay good compensation.

There are situations where employees still think about this step, for example in the event of a conflict, burnout or a disrupted employment relationship. Then it is important to first carefully consider what the consequences are. Also resign with a settlement agreement can help you understand that better.

How do you check a settlement agreement?

Before signing, you should check the agreement carefully. Don't just look at the amount. The following questions are just as important:

• Is the reason for dismissal in a neutral way?
• Is it clear that the initiative lies with the employer?
• Is the end date correct?
• Has the notice period been properly processed?
• Are your unemployment rights sufficiently protected?
• Is the compensation reasonable?
• Are vacation days, bonus and final bill included in full?
• Are additional terms clear and acceptable?

If you are unsure, it is wise not to sign immediately. Control is essential, especially in the event of illness, reorganization or high financial interests.

When not to sign a settlement agreement?

In some situations, it is wiser not to agree immediately. This applies, for example, to:

• Time pressure. If the employer wants you to sign quickly, that's just a reason to be extra critical.
• Illness. In the event of illness, you often have protection against dismissal. See also VSO in case of illness.
• A non-WW-proof agreement. If the correct formulations are missing, you run the risk of problems with your benefit.
• Too low a fee. Then continuing to negotiate or refuse is sometimes better.
• Unclear agreements. For example, about bonus, final settlement, clauses or notice period.

Also the disadvantages of a settlement agreement and negotiating a VSO help to better assess this moment.

What to do if you receive a settlement agreement?

If you receive a VSO, it is wise to act calmly and in a structured manner.

1. Read the agreement in full
2. Check that the reason for dismissal is neutral
3. See if the initiative is clearly with the employer
4. Check the end date and notice period
5. Review the fee and additional appointments
6. In case of doubt, have the content checked
7. Negotiate where necessary
8. Don't sign until everything is correct

For your next step, it can also help to look beyond just dismissal. Then are what outplacement is, what an outplacement process is and career guidance logical next steps.

Need help with a settlement agreement?

A settlement agreement can be a decent solution, but only if your rights are well protected and the content is correct. Especially when it comes to questions about unemployment benefits, notice, compensation, illness or negotiation, it is wise to look carefully at the details.

If you want to arrange your next step properly, you can outplacement, an outplacement process, what outplacement is and what an outplacement process is help to look ahead in a focused way.

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