Dismissal just before retirement age

Russell Advocaten B.V.
Amsterdam, Netherlands

Employees who have almost reached retirement age are entitled to full transition compensation, even though this compensation might far exceed their salary up until retirement age. What do you have to keep in mind in dismissal of employees who have almost reached retirement age?

No transition compensation upon reaching retirement age

Employers don’t have to pay transition compensation to employees whose employment contract is terminated due to reaching retirement age. After all, they are entitled to old-age pension (AOW) and often also a supplementary pension. Therefore, they no longer have to rely on performing work for their support. One of the most important objectives of transition compensation which is compensation for the consequences of dismissal therefore lapses.

Age discrimination?

According to the Supreme Court, the system that no transition compensation is due to employees who have reached retirement age or will reach it on the day of the termination does not constitute age discrimination. The reason is that excluding these categories contributes to a legitimate objective of the Work and Security Act, which is making dismissal less costly for the employer. Therefore, the employer must be able to terminate an employment contract without substantive review and costs when the employee has reached retirement age.

Transition compensation just before retirement age

Before the Work and Security Act was introduced, the employee was entitled to severance payment with the rule that this compensation should not exceed the salary the employee was entitled to up until retirement age. Such a “capping” of the severance payment is not provided for in the Work and Security Act. The law does not discriminate between employees who have almost reached retirement age and employees who haven’t.

Are employees thus entitled to full transition compensation, even if it far exceeds the salary they would be entitled to up until retirement age?

This question was raised when an employer was finding himself in a frustrating situation. The employment contract with a teacher was terminated after two years of sickness with permission from the UWV. The teacher then claimed full transition compensation in the subdistrict court. The school objected, inter alia with the contention that this compensation was substantively higher – because he had been in service for almost forty years – than the salary he would have received in the event of capacity for work until reaching the pension age.

Therefore, the subdistrict court reduced the transition compensation from EUR 73,541 to EUR 25,000. On appeal – which was endorsed by the Supreme Court – the decision by the subdistrict court was quashed and the employee was still entitled to full transition compensation. Both the Court of Appeal and the Supreme Court established that the law did not allow for a reduction of the transition compensation because of the upcoming retirement age.

However unreasonable it might seem that the employer has to pay full transition compensation in this situation, it was the choice of the legislator not to include capping of compensation in the Work and Security Act.

Conclusion

Employees who will reach state pension age shortly after termination of the employment are entitled to full transition compensation. To avoid transition compensation after two years of incapacity to work, an alternative for the employer would be to keep the employment dormant until the employee has reached retirement age. Once termination is effected, it cannot be converted into dormant employment.

If the employee is fit for work, dormant employment is no option. Dismissal could then be more costly than continuing the employment up until the pension date. Therefore, think carefully before dismissing an employee just before he reaches the pension date.

More information?

Do you have any questions about the timing of a dismissal or transition compensation? Would you like advice regarding employees that have (almost) reached the retirement age (AOW-age)? Please contact Russell Advocaten