Compensation for Transitional Payment

The compensation for transitional payments has become well established. Many employers are now familiar with the process of approaching the UWV (Employee Insurance Agency) to reclaim payments made to employees after two years of illness. This compensation scheme for transitional payments was introduced on 1 April 2020 for employers – but what is the current situation? 
 

Employer Responsibility and the Xella Judgment 

As an employer, you may encounter a situation where an employee is unable to perform their agreed duties due to long-term illness. In line with the principles of good employer conduct (Article 7:611 of the Dutch Civil Code), you are generally expected to respond positively to a reasonable request from your employee to terminate their employment with a payment equivalent to the amount you can reclaim from the UWV (see also Article 7:673e, paragraph 2). This obligation was firmly established in the ‘Xella judgment’ by the Dutch Supreme Court. 

The introduction of the mandatory transitional payment highlighted the need to address the growing issue of dormant employment contracts. Following the Xella judgment, the Netherlands has gradually moved away from this practice. This shift accelerated with the implementation of the compensation scheme for transitional payments on 1 April 2020, which also provided retroactive compensation for payments already made. 
 

Interest in Continuing the Employment Contract 

As the transitional payment is now compensated, you, as an employer, may no longer have a valid reason to continue the employment contract. However, if you still have a legitimate interest in maintaining the contract, you are not obliged to accept a termination proposal. A realistic opportunity for reintegration could be such an interest, whereas impending retirement would not. 
 

Case Law 

A series of significant rulings have since further clarified the scope of the compensation scheme. Some of these are outlined below. It is important to note that in cases of illness lasting two years, a prohibition on termination applies (Article 7:670, paragraph 1 of the Dutch Civil Code). If you terminate the contract prematurely – after the waiting period (104 weeks) but before the two-year mark – you risk losing the right to compensation for the transitional payment. In practice, the end of the waiting period usually differs by only two or three days from the two-year mark. The UWV addresses this through internal policy. Employers who terminate slightly early – after the waiting period but before the two-year period ends – are not denied compensation (ECLI:NL:RBNHO:2023:4846, paragraph 3, second paragraph). 
 

Duration of the Prohibition on Termination During Illness 

For the compensation scheme, it is essential to understand that the two-year prohibition on termination during illness is not a fixed period. This duration can vary if the waiting period is extended. The following rulings provide clarification: 

• An employee reports recovery during the waiting period but becomes ill again within four weeks. The waiting period is then extended by the duration of recovery, ensuring a full 104 weeks of illness. Consequently, the prohibition on termination is also extended (ECLI:NL:RBROT:2025:2572, paragraph 7.1). 
  Example: If the first day of illness was 14 July 2022, the 104-week waiting period would normally end on 11 July 2024. However, if the employee recovered for 10 days in November 2022, the waiting period would extend to 24 July 2024. Terminating the employment before this date would result in the loss of compensation. 

• An employee with a serious illness is granted an early IVA (Income Provision for Fully Disabled Persons) during the waiting period (within 104 weeks). To ensure eligibility for compensation, the employer must maintain the employment contract until the end of the prohibition on termination (ECLI:NL:RBMNE:2022:1887). 

• An exception applies to the 104-week waiting period for a WAO (Invalidity Insurance Act) benefit. In one case, an employee who was already receiving a WAO benefit experienced a new period of illness. Following reassessment – with a shortened four-week waiting period – an increased WAO benefit was granted. Despite the shorter waiting period, the two-year prohibition on termination during illness remained. The employer, who terminated the dormant contract after the waiting period, missed out on compensation (ECLI:NL:CRVB:2024:892). 
   

Noteworthy Case Law 

The following are notable rulings from recent years: 

• The Dutch Supreme Court (ECLI:NL:HR:2020:749) determined that redeployment in a role with the same number of hours but a lower salary may entitle the employee to a partial transitional payment due to loss of income. 

• In a case involving substantial overtime (ECLI:NL:RBROT:2022:8107), the court disagreed with the UWV's method for calculating and compensating the transitional payment. The UWV had only compensated overtime earnings from the final 12 months of employment, but the court ruled this approach was incorrect. This position was later upheld by the Zeeland-West Brabant District Court (ECLI:NL:RBZWB:2024:6808, paragraph 5.9). 

• An employee with a severe illness, who received an early IVA benefit, died before the employment contract was terminated. The court ruled that death is not among the grounds that create a right to a transitional payment under Article 7:673. However, in another case (ECLI:NL:RBDHA:2022:7575), the court granted the transitional payment to the employee’s heirs, as the employment contract had been terminated but not yet ended at the time of death. 

• Employers are advised to specify the correct basis for terminating an employment contract in the settlement agreement, as this affects eligibility for compensation (ECLI:NL:CRVB:2024:303). 

• Employers should also review the method for calculating commission for transitional payments and their compensation (ECLI:NL:CRVB:2024:1033). 
   

The Future 

On 19 February 2025, an internet consultation began regarding a proposal to restrict the Compensation for Transitional Payment scheme to small employers only. But how are 'small employers' defined? These are companies with an annual wage bill of up to 25 times the average wage subject to social insurance contributions. This is often – but incorrectly – interpreted as companies with fewer than 25 employees. 
 

Conclusion 

The compensation for transitional payments was originally introduced to reduce the number of dormant employment contracts. However, this regulation does not oblige medium-sized or large employers to terminate contracts after long-term illness. Are we now, in part, returning to the situation before the introduction of compensation? Moreover, long-term sick employees in medium-sized or large companies are treated differently from those in small companies. This discrepancy is also noteworthy.