Dismissal Compensation (Ontslagvergoeding) in the Netherlands

When your employer ends your employment in the Netherlands, you may be entitled to financial compensation. But "dismissal compensation" is not a single concept — Dutch employment law distinguishes between the statutory severance pay (transitievergoeding), the equitable compensation (billijke vergoeding), and the compensation negotiated in a settlement agreement. Understanding the differences is essential for protecting your interests. In this article you will learn about each type of compensation, when you are entitled to more than the statutory minimum, and how to negotiate the best possible outcome.

Overview of dismissal compensation in the Netherlands

In the Netherlands, the term "dismissal compensation" (ontslagvergoeding) is used broadly to describe any financial payment an employee receives when their employment ends. However, Dutch employment law does not have a single, unified compensation scheme. Instead, several different types of compensation may apply, depending on the circumstances of the dismissal. As an employee, it is important that you understand the distinction between these types, because they determine what you are entitled to and what you can negotiate.

The three main forms of dismissal compensation are:

• Transitievergoeding (statutory severance pay): a fixed compensation calculated by law, owed in most cases when the employer terminates the employment. This is the statutory minimum.
• Billijke vergoeding (equitable compensation): an additional compensation that a court can award when the employer has acted in a seriously culpable manner. This is not automatic and must be claimed through the subdistrict court.
• Compensation in a settlement agreement: a freely negotiated amount agreed upon by employee and employer when they terminate the employment by mutual consent through a settlement agreement.

Before 2015, the so-called "subdistrict court formula" (kantonrechtersformule) was the primary method for calculating dismissal compensation. This formula, based on factors such as age, years of service, and a "correction factor" reflecting the circumstances, could result in substantially higher payments than the current transitievergoeding. The Work and Security Act (Wet werk en zekerheid) of 2015 replaced this system with the transitievergoeding, making statutory severance pay more predictable but often lower than under the old formula.

Transitievergoeding: the statutory minimum

The transitievergoeding (literally "transition compensation") is the statutory severance pay regulated in Article 7:673 of the Dutch Civil Code (BW). It was introduced on 1 July 2015 and reformed on 1 January 2020 by the Balanced Labour Market Act (Wet arbeidsmarkt in balans, or WAB). Since 2020, you are entitled to severance pay from your very first day of employment.

The calculation is straightforward:

You are entitled to the transitievergoeding when:

• Your employer terminates your employment contract (via UWV or the subdistrict court).
• Your employer does not renew a fixed-term contract.
• You resign due to seriously culpable acts or omissions by the employer.
• Your employment ends after two years of illness.

There is an annual statutory maximum for the transitievergoeding. In practice, this cap mainly affects employees with high salaries or very long service periods. The government adjusts this maximum annually.

While the transitievergoeding provides a predictable minimum, it is often relatively modest compared to the compensation employees received under the old subdistrict court formula. This is why understanding the other forms of compensation — and knowing when you can claim them — is so important.

Equitable compensation (billijke vergoeding)

The equitable compensation (billijke vergoeding) is an additional payment that the subdistrict court can award on top of the transitievergoeding. It is regulated in several provisions of the Dutch Civil Code, including Articles 7:671b lid 9 sub c, 7:681, and 7:682 BW. The billijke vergoeding is only available through a court procedure and is reserved for cases where the employer has been seriously culpable (ernstig verwijtbaar) in the termination of the employment.

When can you claim equitable compensation?

The billijke vergoeding may be awarded in several situations:

• Seriously culpable employer conduct leading to dismissal: if the subdistrict court dissolves the employment contract at the employer's request and determines that the grounds for dissolution are the result of the employer's seriously culpable acts or omissions. Examples include persistent discrimination, creating an unsafe working environment, fabricating a dismissal ground, or failing to comply with reintegration obligations.
• Unlawful dismissal: if the employer has dismissed you without valid permission (no UWV permit, no court authorisation) and the dismissal cannot stand, you may claim the billijke vergoeding under Article 7:681 BW instead of (or in addition to) reinstatement.
• Violation of dismissal prohibitions: if you are dismissed in violation of a statutory dismissal ban (for example during illness, pregnancy, or membership of the works council) and the court does not reinstate you, you may be awarded equitable compensation.
• Resignation due to seriously culpable employer conduct: if you resign because of your employer's seriously culpable behaviour, you can claim both the transitievergoeding and the billijke vergoeding through the court.

How is the billijke vergoeding calculated?

Unlike the transitievergoeding, there is no fixed formula for the billijke vergoeding. The Supreme Court (Hoge Raad) ruled in the landmark New Hairstyle case (ECLI:NL:HR:2017:1187, 30 June 2017) that the billijke vergoeding should serve as compensation for the consequences of the employer's seriously culpable conduct. The court must take into account all circumstances of the case, including:

• The income that the employee would have earned if the employment had continued.
• The employee's chances of finding new employment and the expected duration of unemployment.
• Whether the employee has already received the transitievergoeding.
• The degree of culpability on the employer's part.
• The employee's personal circumstances (age, health, financial situation).

In practice, equitable compensation awards vary enormously — from a few thousand euros to over a hundred thousand euros or even more in extreme cases. The amount depends heavily on the specific facts and the judge's assessment. Courts have awarded billijke vergoedingen of several tens of thousands of euros in cases involving systematic bullying, constructive dismissal, or fabricated reorganisations aimed at removing a specific employee.

Compensation in a settlement agreement

The most common way that dismissal compensation is determined in practice is through negotiation in a settlement agreement (vaststellingsovereenkomst). When your employer proposes to end the employment by mutual consent, the compensation is not fixed by law — it is the result of negotiation between you and your employer.

In theory, you could agree on any amount in a settlement agreement, from nothing to multiples of the transitievergoeding. In practice, the transitievergoeding serves as the baseline for most negotiations. The employer knows that if you refuse the settlement agreement, they would have to follow a formal dismissal route (via UWV or the subdistrict court) where you would be entitled to at least the statutory severance pay. This creates a natural floor for negotiations.

The compensation in a settlement agreement frequently exceeds the transitievergoeding, particularly when:

• The employer does not have strong legal grounds for dismissal and would likely lose in court.
• The employer has contributed to the disrupted working relationship (for example through poor management, harassment, or failure to follow a proper improvement process).
• The employer wants a quick and certain resolution rather than a lengthy legal procedure.
• You have a long employment history, making you a "costly" employee to dismiss through formal channels.
• There are grounds for equitable compensation that the employer wants to avoid being tested in court.
• The employer wants you to agree to a non-compete clause or other restrictive terms.

On the other hand, in a reorganisation with an established social plan, the room for individual negotiation may be more limited, as the social plan typically sets the terms for all affected employees.

Factors that affect the amount of dismissal compensation

Whether your compensation ends up at the statutory minimum or significantly higher depends on a range of factors. Understanding these factors helps you assess your position and negotiate effectively.

Years of service

The longer you have worked for your employer, the higher the transitievergoeding. But years of service also affect your negotiating position: a long-serving employee represents a larger investment for the employer, and dismissal via formal channels becomes more expensive. This gives you more leverage in negotiations.

Salary level

Your gross monthly salary — including holiday allowance, 13th month, and variable components — directly determines the transitievergoeding. Employees with higher salaries naturally receive a higher statutory minimum. In settlement negotiations, the monthly salary also influences the overall package because it determines the cost of the notice period and continued pay.

Reason for dismissal

The ground for dismissal is perhaps the most important factor in negotiation. If the employer's reason for dismissal is weak (for example, alleged dysfunction without a proper improvement process, or a reorganisation that does not meet the legal requirements), the employer faces a real risk of losing in court. This significantly strengthens your bargaining position.

Employer culpability

If the employer has acted improperly — through harassment, discrimination, breach of duty of care, or creating an unworkable situation — this can form the basis for a billijke vergoeding claim. Even in settlement negotiations, the threat of a billijke vergoeding claim can lead to substantially higher compensation.

Your personal circumstances

Factors such as your age, health, position in the labour market, and family situation can influence both a court's assessment and your negotiating position. An older employee with limited job prospects in a specialised field may be awarded or negotiated more compensation than a young employee in a sector with abundant job opportunities.

Sector and company size

Larger companies and certain sectors (such as finance, IT, and legal services) tend to offer higher compensation packages, partly because they are more accustomed to settlement negotiations and have larger budgets. Smaller companies may have genuine financial constraints that limit what they can offer.

Negotiating your dismissal compensation

Effective negotiation of dismissal compensation requires preparation, knowledge, and strategy. Here are the key principles that can help you achieve a better outcome.

Know your legal position

Before entering negotiations, understand what you are legally entitled to and what your employer's legal position is. Calculate your transitievergoeding, assess whether there are grounds for a billijke vergoeding, and evaluate the strength of the employer's case for dismissal. A lawyer can help you with this assessment.

Do not sign under pressure

Employers sometimes create urgency by setting short deadlines or suggesting that the offer will be withdrawn. You are never obliged to sign immediately. Take the time to have the agreement reviewed and to formulate a counter-proposal. If the employer refuses to give you reasonable time, this may itself be a negotiation point or, in extreme cases, grounds for challenging the agreement.

Consider the full package

Dismissal compensation is not just about the lump sum payment. The total package includes the end date (continued salary), release from duties, lifting of non-compete clauses, outplacement budget, legal costs contribution, and the wording of the certificate of employment. Sometimes concessions on these points are more valuable than a marginally higher severance payment.

Use the employer's motivation

Understand why the employer wants to use a settlement agreement rather than a formal dismissal route. If the employer wants certainty and speed, they are paying a premium for your cooperation. If they want to avoid negative publicity or a court case, this creates additional leverage. The value of your signature depends on what the alternative costs the employer.

Put it in writing

Always negotiate in writing (email) so that there is a record of the offers and counteroffers. Verbal promises from your employer are difficult to enforce if they are not included in the final agreement.

Practical examples

To illustrate how different factors lead to different outcomes, here are several practical scenarios:

Example 1: Standard reorganisation

Maria has worked for a medium-sized company for 8 years. Her gross monthly salary is €4,000 (including holiday allowance and 13th month: €4,693). The company is reorganising and her position becomes redundant. The employer offers a settlement agreement.

• Transitievergoeding: 1/3 × €4,693 × 8 = approximately €12,515.
• Settlement outcome: because the reorganisation is genuine and well-documented, the negotiation space is limited. Maria negotiates the compensation to €14,000 (slightly above the transitievergoeding) plus a legal costs contribution of €750 and release from duties during the notice period.

Example 2: Dysfunctional performance without proper process

David has worked for a large employer for 5 years at a gross monthly salary of €5,500 (total monthly salary for calculation: €6,435). The employer claims dysfunction but has not followed a proper improvement process (no performance plan, no coaching, no formal warnings).

• Transitievergoeding: 1/3 × €6,435 × 5 = approximately €10,725.
• Settlement outcome: because the employer's case is weak (the court would likely reject the dismissal request due to the absence of an improvement process), David's lawyer negotiates a compensation of €25,000 — more than double the transitievergoeding — plus lifting of the non-compete clause, outplacement budget, and release from duties.

Example 3: Disrupted working relationship with employer culpability

Sophie has worked for a financial services firm for 12 years. Her total monthly salary for calculation purposes is €7,200. After a change in management, she faced systematic exclusion from meetings, removal from projects, and demeaning comments. The employer offers a settlement agreement citing a "disrupted working relationship."

• Transitievergoeding: 1/3 × €7,200 × 12 = approximately €28,800.
• Settlement outcome: Sophie's lawyer identifies strong grounds for a billijke vergoeding based on the employer's culpable behaviour. The threat of a court procedure results in a settlement of €65,000, more than double the transitievergoeding, plus full release from non-compete obligations and a positive reference.

Tax implications of dismissal compensation

All forms of dismissal compensation in the Netherlands are taxed as income from (former) employment in box 1 of the income tax system. Your employer withholds payroll tax and national insurance contributions when making the payment. Because the compensation is added to your regular income in the year of payment, it may push you into a higher marginal tax bracket.

The higher income in the payment year can also affect your eligibility for income-dependent allowances (toeslagen), such as healthcare allowance (zorgtoeslag), housing allowance (huurtoeslag), and childcare allowance (kinderopvangtoeslag).

If your employment ends late in the calendar year, it may be beneficial to agree that the severance payment is made in January of the following year, when your overall income may be lower. Discuss this possibility with your employer and a tax adviser.

There is no way to receive dismissal compensation tax-free. However, if part of the compensation is allocated to a specific purpose such as an outplacement budget or training, this may in certain cases have a more favourable tax treatment. The conditions for this are strict and should be discussed with a tax professional.

Frequently asked questions about dismissal compensation

What is the difference between transitievergoeding and ontslagvergoeding?

The transitievergoeding is the statutory severance pay that your employer must pay by law when they terminate your employment. The term ontslagvergoeding (dismissal compensation) is broader and includes any compensation upon dismissal, such as the transitievergoeding, the billijke vergoeding, and any additional compensation negotiated in a settlement agreement. The transitievergoeding is always the minimum; the total ontslagvergoeding can be higher.

Can I receive more than the transitievergoeding?

Yes. In many cases, particularly when you are offered a settlement agreement, the compensation is negotiable and can exceed the transitievergoeding. If the employer has acted in a seriously culpable manner, the court may additionally award equitable compensation (billijke vergoeding). An employment lawyer can assess what is realistic in your situation.

What is equitable compensation (billijke vergoeding)?

The billijke vergoeding is an additional compensation that a subdistrict court can award on top of the transitievergoeding when the employer has been seriously culpable. It is not calculated with a fixed formula but depends on all circumstances, including the consequences of the dismissal for the employee. It must be claimed through the court — it cannot be automatically demanded in a settlement negotiation, but the prospect of such a claim strengthens your negotiating position.

How do I negotiate higher dismissal compensation?

Know your legal position, understand the employer's motivation, and do not accept the first offer. Calculate your transitievergoeding, assess whether grounds for equitable compensation exist, evaluate the strength of the employer's dismissal case, and consider the full package (not just the lump sum). Professional legal advice typically leads to significantly better outcomes.

Is dismissal compensation taxed?

Yes. All forms of dismissal compensation are taxed as income in box 1 of the Dutch income tax system. Your employer withholds payroll tax and social security contributions at the time of payment. The compensation can push you into a higher tax bracket and may affect your eligibility for income-dependent government allowances in the year of payment.

Does the old kantonrechtersformule still apply?

No. The subdistrict court formula (kantonrechtersformule) was officially replaced by the transitievergoeding on 1 July 2015. However, some lawyers and employers still use elements of the old formula as a reference point in settlement negotiations, particularly the "correction factor" concept. This is not legally binding, but it can be a useful negotiation tool.