A settlement agreement (vaststellingsovereenkomst, VSO) compensation refers to the financial arrangements that an employer and employee make when ending an employment contract by mutual consent. In outplacement, these payments play a major role, because they can contribute to a smooth transition to other work. In this article you will read what a compensation payment actually involves, how it is determined and what to look out for.
What is a settlement agreement and why is it used?
A settlement agreement (vaststellingsovereenkomst, VSO) is a written arrangement between an employer and employee in which both parties voluntarily decide to end the employment relationship. In the Netherlands, this arrangement is often used to avoid lengthy procedures with the UWV (the Dutch employee insurance agency) or the subdistrict court. By negotiating together, both parties can part ways more quickly and with greater control over the terms.
An important part of the VSO is the compensation payment. This financial compensation is intended to soften the loss of income resulting from dismissal. In many cases, the compensation is used to support the transition to new work, for example through outplacement support. Employers often choose a VSO when there is a reorganisation, redundancy or a workplace conflict.
How is the compensation in a settlement agreement determined?
The compensation in a settlement agreement is not prescribed by law, but is the result of negotiation between employer and employee. It often follows the statutory transition payment (transitievergoeding), as laid down in the Dutch Civil Code. The transition payment is a minimum to which employees are generally entitled on dismissal, but the parties can agree on a higher payment.
The amount of the compensation depends on factors such as the length of employment, the salary, the reason for dismissal and any personal circumstances. In some cases, the compensation is used partly or fully for an outplacement programme, to help the employee find new work. You can read more about determining the cost of outplacement in our supporting article.
Example: An employee with ten years of service and a gross monthly salary of €3,000 is, according to the statutory calculation, entitled to approximately €15,000 in transition payment. The employer and employee can agree that €4,000 of this is used for outplacement support.
Which types of compensation occur?
In addition to the transition payment, other forms of compensation can be included in a settlement agreement. Consider an additional severance payment, compensation for untaken holiday days, or compensation for the loss of a bonus. In the context of outplacement, a specific amount is often set aside for coaching, training or career advice.
It is important that these arrangements are clearly set out in the VSO. Ambiguities can later lead to disputes or problems with bodies such as the UWV. Information about the final settlement on leaving employment is relevant when trying to understand which payments you can expect.
The relationship between settlement agreement compensation and outplacement
Outplacement is a guided programme in which employees who lose their job are supported in finding new work. The compensation agreed in the VSO can be used partly or fully for outplacement. Employers do this not only to fulfil their social responsibility, but also to meet their duty of good employership.
A well-organised outplacement programme offers a tailored approach and supports the employee in coming to terms with the dismissal, identifying career options and looking for new challenges. Read more about the meaning and process of outplacement if you want to explore this further.
In practice, employers use various arrangements. Sometimes the employee receives an amount they can spend freely, and sometimes the outplacement programme is provided directly by the employer through a service provider such as Care4Careers.
Legal points of attention and rights regarding the compensation
Under Dutch law, it is essential that the settlement agreement is drawn up in such a way that the employee retains the right to unemployment benefit (WW). The reason for dismissal must always be phrased neutrally in the VSO, for example by referring to ‘business economic reasons’ or ‘a difference of insight’ without attributing blame.
The UWV, the implementing body for unemployment benefits, assesses whether the employee has become involuntarily unemployed. Incorrect wording in the VSO can lead to loss of the right to WW. That is why it is wise to seek legal advice in advance, especially when it comes to spending the compensation on outplacement.
Further reading on retaining WW rights with a settlement agreement is available in our supporting article.
Practical examples: how does the compensation work in practice?
Suppose an employee at a healthcare institution is made redundant due to a reorganisation. The settlement agreement stipulates that the employee receives a severance payment of €12,000, of which €3,000 is made available for an outplacement programme. The employee is free to choose which outplacement provider to engage, as long as the invoice goes directly to the employer.
In another scenario, the employer chooses to offer, in addition to the transition payment, an extra budget for personal coaching after dismissal, because the employee is having difficulty finding suitable work. This can make a big difference in finding sustainable new employment.
Tax aspects of the compensation
The compensation paid under a settlement agreement is usually taxed as income from a former employment relationship. This means that payroll tax and contributions are withheld. When the compensation is used directly for outplacement, different tax rules often apply: this compensation can remain untaxed if the employer pays for the programme directly.
For employees, this means that it can be more advantageous if outplacement is not settled through the severance payment, but paid directly by the employer. For more details on the tax treatment of the transition payment, read our in-depth article.
Tips for arranging a compensation as well as possible
Good preparation is important. Find out in advance what has been agreed in comparable situations, for example with colleagues or through trade unions. Negotiate not only about the amount of the compensation, but also about its purpose, such as the option of outplacement. Set out all arrangements in writing and check that the wording is in line with the requirements of the UWV.
Bear in mind that there is room to make tailored arrangements. In some cases it is possible to set aside part of the compensation for training or guidance. Make use of the expertise of organisations such as Care4Careers to gain insight into the options for outplacement support.
The importance of a tailored approach and transparency
Every dismissal situation is unique. That is why it is important to look not only at the standard transition payment, but also at additional wishes and needs. Tailored arrangements about how the compensation is spent can ensure a better start on the labour market after dismissal.
Transparency between employer and employee prevents misunderstandings. Clear and honest communication about the purpose of the compensation, for example whether it is used for outplacement or paid out directly, helps ensure a smooth conclusion of the employment relationship.
Summary
A settlement agreement compensation is an essential part of ending an employment contract by mutual consent. The amount and how it is spent are agreed together and can offer a solution in outplacement. Pay attention to the legal and tax aspects, ensure clear arrangements, and make use of the options for a tailored approach. Outplacement can be a valuable tool for a fresh start on the labour market.
Are you unsure about what your VSO says? Have your settlement agreement reviewed by an expert from Care4Careers, so you can be sure you have not overlooked anything.