Settlement Agreement (Vaststellingsovereenkomst)

A settlement agreement (vaststellingsovereenkomst or VSO) is an agreement by which you and your employer terminate the employment contract by mutual consent. It is the most common way to end an employment contract in the Netherlands. In this article you can read what a settlement agreement entails, what your rights are, what risks you face and what to watch out for.

What is a settlement agreement?

A settlement agreement (vaststellingsovereenkomst or VSO), also called a termination agreement, is a written agreement by which you and your employer terminate the employment by mutual consent. It is not a unilateral dismissal: both parties must agree to the terms.

The settlement agreement as a legal concept is regulated in Article 7:900 of the Dutch Civil Code (BW). This article regulates the settlement agreement in general — it is not specifically written for employment law, but is widely used in practice to settle employment disputes and terminate employment contracts. The specific employment law protection with a settlement agreement (such as the cooling-off period and the written form requirement) is laid down in Article 7:670b BW.

In practice, the employer offers a settlement agreement when they want to terminate the employment without going through the UWV or the subdistrict court. Common reasons include a reorganisation, a disrupted working relationship, economic reasons or a difference of opinion about performance. As an employee, you are never obliged to sign a settlement agreement.

What does a settlement agreement contain?

A settlement agreement typically contains agreements on all aspects of the termination of your employment. The exact content varies per situation, but the following components are almost always included:

• Reason for termination: the ground on which the employment is terminated. This is of great importance for your right to unemployment benefits. The agreement must clearly show that the initiative lies with the employer.
• End date: the date on which your employment contract ends. The fictitious notice period must be taken into account. The calculation depends on the statutory or contractual notice period and the moment at which valid notice could have been given (often at the end of the month). This is not always the same as the date of signing.
• Severance payment: the amount you receive at the end of the employment. The statutory severance pay is often used as a reference, but the compensation in a settlement agreement is the result of negotiation.
• Release from duties: whether you still have to work until the end date or are released with continued pay. This is not a statutory right, but a negotiable point.
• Non-compete and non-solicitation clause: whether any clauses from your employment contract are lifted, limited or maintained. Note: with a temporary contract, a non-compete clause is only valid if the employer has provided a written justification for why the clause is necessary.
• Training costs clause: if you have a training costs arrangement, the employer may claim repayment upon departure. Agreements can be made about this in the settlement agreement.
• Certificate of employment: agreements about providing a (positive) certificate of employment or references.
• Holiday days and holiday allowance: payment of outstanding holiday days and accrued holiday allowance.
• Final discharge: a provision that both parties have no further claims after execution of the agreement. Note: final discharge can also cover claims you are not yet aware of at the time of signing. Ensure outstanding items (holiday pay, bonuses, overtime) are explicitly excluded or settled in the compensation.
• Cooling-off period: the mention of the statutory 14-day cooling-off period.
• Legal costs contribution: a contribution from the employer towards your legal advice costs.

Difference between a settlement agreement and dismissal

An important distinction is that a settlement agreement is not legally considered a dismissal. With a settlement agreement, the employment ends by mutual consent, while with dismissal the employer unilaterally terminates the employment. This difference has legal consequences:

• With unilateral dismissal, the employer must request permission from the UWV (for economic reasons or long-term illness) or from the subdistrict court (for personal grounds). With a settlement agreement, this intervention is not needed.
• With dismissal, dismissal bans apply (during illness, pregnancy, etc.). You can in principle sign a settlement agreement at any time, but this can have serious consequences for your benefit rights. If you are ill and sign a settlement agreement, you lose the continued payment by your employer and risk the UWV refusing your Sickness Benefits Act claim.
• With dismissal via the subdistrict court, the court determines the compensation. With a settlement agreement, the compensation is the result of negotiation between you and your employer.

Precisely because a settlement agreement is concluded on a voluntary basis, it is essential that you are well informed before signing. After all, you are voluntarily giving up rights that you would automatically have with unilateral dismissal.

Your rights with a settlement agreement

Although a settlement agreement is concluded on a voluntary basis, as an employee you have various rights that protect you:

No obligation to sign

You are never obliged to sign a settlement agreement. Your employer cannot force you, not even through threats or setting a short ultimatum. If your employer puts you under great pressure, this can in exceptional cases be considered abuse of circumstances (Article 3:44 paragraph 4 BW). However, a successful appeal on this ground is not straightforward in practice: you must demonstrate that the employer abused your vulnerable position and that you signed involuntarily as a result.

Right to reflection time

After signing, you have a statutory cooling-off period of 14 days to dissolve the agreement. This right is legally established and cannot be contractually excluded. Prior to signing, it is customary to receive a reasonable period to study the agreement and seek legal advice. Note: the law stipulates that if you invoke the cooling-off period and subsequently enter into a new settlement agreement with the same employer within six months, you generally do not have a second cooling-off period (Article 7:670b paragraph 4 BW).

Right to legal advice

You always have the right to seek legal advice before signing. Many settlement agreements include a contribution for legal assistance. Make use of this: a lawyer can recognise provisions that are disadvantageous to you and that you might overlook yourself.

The compensation in a settlement agreement

With a settlement agreement, there is legally no automatic right to the statutory severance pay — the compensation is negotiable. In practice, however, the severance pay is often used as a reference. It is also important to realise that if you do not sign, your employer would have to follow a different dismissal route (via UWV or subdistrict court) where in most cases you would be entitled to the statutory severance pay. This knowledge strengthens your negotiating position.

Risks of signing a settlement agreement

Signing a settlement agreement is a significant decision. There are various risks to consider:

• Unemployment benefits: if the agreement does not meet certain conditions, you may lose your right to unemployment benefits. The UWV assesses the totality of circumstances, not just the text of the agreement. In addition to the wording, the UWV also looks at your conduct, the actual situation and whether you became unemployed through your own fault.
• Too low compensation: without legal advice, you risk agreeing to compensation that is lower than what would be reasonable given the circumstances. Whether there is room for higher compensation depends on factors such as the dismissal ground, the strength of the employer's case and your personal circumstances.
• Non-compete clause: if the non-compete or non-solicitation clause is not lifted in the agreement, you may be restricted in your career after dismissal. Also check whether the clause is actually valid: with a temporary contract, a non-compete clause is only valid with a written justification.
• Final discharge: the final discharge clause means you can no longer make claims after signing. This can also apply to claims you are not yet aware of at the time of signing. Ensure outstanding items (holiday pay, bonuses, overtime) are explicitly settled or excluded.
• Illness: are you ill when you receive a settlement agreement? Then the risks are considerably greater. You lose the continued payment by your employer (which can legally last up to two years) and the reintegration support. Moreover, the UWV can refuse a Sickness Benefits Act claim. Read more about the settlement agreement during sick leave.
• Pension accrual: with the end of your employment, pension accrual via your employer also stops. Depending on your age and length of service, this can have a significant long-term financial impact.

Negotiating your settlement agreement

A settlement agreement is in principle negotiable. The proposal you receive from your employer is usually an initial offer. Whether there is actually room to negotiate better terms depends strongly on the specific situation. In a reorganisation with an established social plan, the room is limited, while in a disrupted working relationship without a strong case, the employer is often more willing to make concessions.

Components that can be negotiated in appropriate cases:

• The severance payment: often the most important negotiation point. Your position is stronger if the employer has taken the initiative and has no strong legal ground for dismissal.
• The end date: a later end date can be beneficial for your unemployment benefit rights and means continued pay for longer.
• Release from duties: not having to work during the period until the end date while retaining pay. This is not a standard right.
• Lifting of clauses: having non-compete, non-solicitation or confidentiality clauses lifted.
• Training costs clause: waiver of any repayment obligation.
• Certificate of employment: agreements about the content and tone of the certificate.
• Outplacement: a budget for guidance towards a new job. This is not legally regulated and does not apply in all situations, but can be negotiated in some cases.
• Legal costs contribution: a contribution towards the costs of your legal advisor.

Your negotiating position depends on various factors: the reason for dismissal, the strength of the employer's case, the financial situation of the company, your years of service and your personal circumstances. A lawyer can assess your position and advise you on what is realistically achievable.

The 14-day cooling-off period

After entering into a settlement agreement, you have a statutory cooling-off period of 14 days under Article 7:670b paragraph 2 BW. Within this period you can dissolve the agreement in writing, without giving reasons. This right cannot be contractually excluded or limited.

The cooling-off period starts when the settlement agreement has been concluded, usually the moment of signing by both parties. If the cooling-off period is not mentioned in the agreement, it is automatically extended to 21 days under Article 7:670b paragraph 3 BW.

You dissolve the agreement by sending a written statement to your employer. Legally, one written notification (an email or letter) is sufficient. However, it is advisable to keep proof of timely dispatch. You do not need to give a reason for the dissolution.

Settlement agreement and unemployment benefits

A frequently asked question is whether you are entitled to unemployment benefits after signing a settlement agreement. In most cases this is possible, provided certain conditions are met. However, the UWV assesses the totality of circumstances — not just the text of the agreement, but also your conduct, the actual situation and whether you became unemployed through your own fault.

Important considerations for your unemployment benefit rights:

• Employer's initiative: the agreement must show that the initiative for termination lies with the employer. However, this alone is not always sufficient: the UWV can also look at the actual course of events.
• No urgent reason: no culpable reason (such as theft or refusal to work) may be stated as the ground for dismissal.
• Correct notice period: the end date must account for the fictitious notice period. The calculation depends on the statutory or contractual notice period and the moment at which valid notice could have been given. Note: the contractual notice period may differ from the statutory period. If the notice period is not correctly processed, the UWV may impose a waiting period during which you receive no benefits.
• No culpable unemployment: the UWV assesses whether you became unemployed through your own fault. This goes beyond just the text of the agreement.

In addition, you must meet the regular unemployment benefit conditions: you must have accrued sufficient employment history (the weeks requirement and the years requirement) and you must be available for the labour market. Register as a jobseeker with the UWV on the first working day after the end of your contract.

Tax and financial consequences

Signing a settlement agreement has various financial consequences that go beyond the severance payment alone:

Tax on the severance payment

The severance payment is taxed as income from former employment and falls in box 1 of income tax. Depending on the amount, the payment may (partially) fall in a higher tax bracket. Moreover, the payment can affect your entitlement to income-dependent allowances (such as healthcare allowance, housing allowance or childcare allowance) in the year of payment.

Pension accrual

With the end of your employment, pension accrual via your employer stops. Depending on your pension scheme and your age, this can have a significant effect on your eventual pension. Check with your pension fund about the consequences and the possibilities for voluntary continuation of accrual.

Training costs clause

If you have followed a course or training at the employer's expense, a repayment obligation may apply. Check whether the agreement contains provisions about this and whether the training costs clause is enforceable. In some cases, a training costs clause is unenforceable, for example if the repayment arrangement is not proportionate.

Why have your settlement agreement checked?

A settlement agreement is a legal document with potentially major financial consequences. Yet many employees sign without having the agreement checked, often because the situation is stressful or because the employer insists on a quick decision. The risks are real:

• The offered compensation may be lower than what is reasonable given the circumstances.
• Errors in the wording can jeopardise your right to unemployment benefits.
• Legal pitfalls such as a broadly formulated final discharge, a non-lifted non-compete clause or an incorrectly calculated fictitious notice period are difficult for non-lawyers to recognise.
• Tax consequences and effects on your pension accrual are not always foreseen.

At OntslagLegal you can have your settlement agreement checked for free. Our experienced lawyers assess every component and provide you with clear, personal advice within 1 business day. This way you know exactly where you stand before you sign.

Frequently asked questions about the settlement agreement

Do I have to sign a settlement agreement?

No, you are never obliged to sign a settlement agreement. It is an agreement that only comes into being if both parties consent. Your employer cannot force you. If you refuse to sign, your employer must follow a different route to terminate the employment, for example via the UWV or the subdistrict court. However, it is sensible to seriously consider the offer and have it assessed.

How much severance can I get?

The amount of compensation depends on various factors: your years of service, your salary, the reason for dismissal, the strength of the employer's case and your personal circumstances. The statutory severance pay (1/3 monthly salary per year of service) is often used as a reference. Whether there is room for higher compensation depends on the specific situation.

How long is the cooling-off period?

After signing the settlement agreement, you have a statutory cooling-off period of 14 days. If the cooling-off period is not mentioned in the agreement, it is extended to 21 days. Within this period you can dissolve the agreement in writing, without giving reasons.

Will I receive unemployment benefits after signing?

In most cases yes, provided the agreement meets the conditions and the UWV judges that you did not become culpably unemployed based on the totality of circumstances. Our lawyers always check this as part of every free agreement review.

What if I am ill and receive a settlement agreement?

If you are ill, extra caution is required. You enjoy special dismissal protection and signing an agreement has direct consequences: you lose continued payment by your employer and the UWV can refuse your Sickness Benefits Act claim. Read more on our page about the settlement agreement during sick leave or have your situation assessed free of charge.

What are the tax consequences of a severance payment?

The severance payment is taxed as income in box 1 and may fall in a higher tax bracket. Moreover, the payment can affect your entitlement to income-dependent allowances in the year of payment. Seek advice on this matter.