The transition payment: which components should be included in the calculation?

Eight years have passed since the introduction of the statutory transition payment. Roughly speaking, this consists of one-third of a month’s salary per year of service. But which amounts on the payslip should or should not be included in the calculation of the monthly salary? The Rotterdam Subdistrict Court recently ruled on the question which components of a so-called IKB (Individual Choice Budget) should be counted in calculating the amount of the transition payment. In this article, we address the salary concept of the transition payment and this recent ruling.

Article 7:673 of the Dutch Civil Code

Article 7:673(2) of the Dutch Civil Code sets out the amount of the transition payments as follows: “The transition payment is equal to one-third of a month’s salary for each year that the employment contract has lasted and a proportional part thereof for a period that the employment contract has lasted less than one year. Further rules on the calculation of the transition payment may be set out by order in council. The transition payment amounts to a maximum of €89,000 or an amount not exceeding the salary over a 12-month period if that salary is higher.

Wage Definition Decree

The definition of the concept of salary in the aforesaid article of the law is set out in the Besluit loonbegrip vergoeding aanzegtermijn en transitievergoeding (Decree concerning Wage Definition relating to Compensation for Notice Period and Transition Payment) (the ‘Wage Definition Decree’). Article 2 of the Wage Definition Decree states, in sum, that wages are understood to be the gross hourly wage multiplied by the agreed working hours per month. It follows from Article 3 of the Wage Definition Decree that the wage must then be increased by:

      1. the holiday allowance and the fixed end-of-year bonus to which the employee would be entitled within 12 months if the employment contract continued, divided by 12;
      2. the agreed fixed wage components due in the 12-month period preceding the date on which the employment contract ends, divided by 12; and
      3. the agreed variable wage components due in the three calendar years preceding the year in which the employment contract ends, divided by 36.

Wage Components Regulations

The Wage Definition Decree was then further implemented in the Wage Components and Working Hours Regulations (the ‘Wage Components Regulations’). Article 4 of the Wage Components Regulations provides an exhaustive list of the fixed wage components referred to in Article 3(b) of the Wage Definition Decree. These are the following components:

  • overtime allowances
  • shift allowances

Article 5 of the Wage Components Regulations then exhaustively lists the variable wage components. These are:

  • bonuses
  • profit distributions
  • end-of-year bonuses

It follows from the explanatory notes to the Wage Components Regulations that wage components not designated in the Wage Components Regulations are not included in the calculation of the amount of the transition payment.

Individual Choice Budget

An Individual Choice Budget (Dutch: IKB) often allow employees to opt to convert part of their monthly income into paid leave and vice versa. The IKB then consists of money and time and replaces the holiday allowance and end-of-year bonus and non-statutory and/or age-related hours. The IKB may furthermore consist of additional items such as a contribution to health insurance or, for instance, a bicycle plan.

Recent ruling by Rotterdam Subdistrict Court

The recent ruling by the Rotterdam subdistrict court involved an IKB of 17.05% of the monthly salary. This IKB consisted of 8% holiday allowance, 6.75% end-of-year bonus, 1.5% employer’s contribution to the life-course savings scheme, and 0.8% (non-statutory) leave. One of the questions that the Rotterdam subdistrict court had to answer in these proceedings was whether the employer’s contribution to the life-course savings scheme and the (non-statutory) leave should be counted in calculating the transition payment. The court found that these components were not designated as fixed or variable wage components in the Wage Components Regulations and subsequently ruled that they should therefore not be counted. In the case in question, only the part of the IKB that related to the holiday allowance and the end-of-year bonus had to be counted in calculating the transition payment.

Conclusion

If your organisation uses an IKB, you should carefully examine which parts of it are or are not mentioned as variable or fixed wage components in the Wage Components Regulations. If the IKB consists of or includes components that are not mentioned in the Wage Components Regulations, the relevant part of the IKB need not be included in the calculation of the transition payment. Among other things, parts of the IKB that relate to (non-statutory) leave or that are payments towards, for instance, a bicycle plan, but also employer contributions to, for instance, health insurance, should not be counted in calculating the transition payment.

Please contact Lise van den Heuvel (+31-6-234 922 48) if you have any questions on this subject.

This article was published in the Newsletter Vestius of August 2023