Settlement agreement and severance pay

How should the payment be recorded correctly, and which financial entitlements must be addressed separately?

How should severance pay be included in a settlement agreement?

In brief: state the gross amount, basis, payment date and any conditions separately in the settlement agreement. Make clear whether the amount equals the statutory transition payment or includes an additional severance payment.

Termination by mutual consent does not automatically create the same statutory payment obligation as formal notice or dissolution by the court. The payment must therefore be agreed expressly. A vague reference to “the statutory payment” may result in a later dispute.

Also prevent salary, holiday allowance, unused holiday, bonus, commission, pension or share rights from disappearing into a single total amount. Identify and settle these entitlements separately.

Gross is not the same as net

A severance payment is generally agreed as a gross amount and taxed through payroll deductions. Do not include a guaranteed net amount without specialist tax advice.

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Recording severance pay correctly in a settlement agreement

At a minimum, record:

the precise gross amount
whether it comprises the transition payment and/or an additional payment
the payment date and method of payment
which pay components will be settled separately
what happens if the agreement is terminated during the cooling-off period
which entitlements are covered by the full and final discharge

Do not combine every financial item into one amount

An undivided total may conceal salary and bonus entitlements or outstanding unused holiday.

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Transition payment and severance pay: the difference

The transition payment as a benchmark

The statutory transition payment applies to certain ways in which employment ends. Under a settlement agreement, it is usually used as a minimum or mathematical starting point.

Additional severance payment

The parties may agree an additional payment above that starting point. The amount may depend on the dismissal position, the employer’s file, culpable conduct and specific loss of income.

Use clear descriptions

The agreement should state which part is the statutory transition payment and which part is an additional payment.

Difference between a transition payment and severance pay

Please note: the description of a payment is less important than the precise arrangements concerning the amount, tax, payment and full and final discharge.

What is a normal severance payment?

More about severance payments

Severance pay overview

Entitlement to a transition payment

Transition payment in a settlement agreement

What is a normal severance payment?

Transition payment at state pension age

Transition payment shortly before state pension age

Which other financial arrangements must be recorded?

In addition to severance pay, check the following parts of the final settlement and termination package.

Termination date

Preferably choose a date after the expiry of the notice period applicable to the employer.

Reason for termination

To avoid problems obtaining Dutch unemployment benefits (WW), the agreement should state a neutral reason, such as redundancy or a damaged employment relationship for which the employee is not to blame.

Severance payment

This is usually an important point. Is the employee entitled to the statutory transition payment, or possibly a higher amount? Ask our specialists about the options.

Will the employee be released from work duties?

This may be particularly important where the employment relationship has broken down or work disappears during a reorganisation.

Will unused holiday be paid?

If the employee is released from work duties for a longer period, the parties sometimes agree that unused holiday will lapse.

Must the employee return company property such as a laptop or telephone?

This may be negotiable. The parties sometimes agree that the employee may keep the laptop or telephone.

Non-compete and non-solicitation clauses

Will these clauses remain in force or lapse? The lapse of a non-compete clause is particularly important if the employee wishes to continue working in the same sector.

Will the employee receive a positive reference letter?

A positive reference letter may be useful when looking for new work.

Will the parties agree full and final discharge?

If the parties agree full and final discharge, they cannot subsequently claim items other than those preserved in the settlement agreement.

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From negotiated amount to clear agreement

1. Identify the amount and its components

Separate the transition payment, any additional payment and all other salary and contractual entitlements.

2. Record payment and tax

State the gross amounts, payment date, any instalments and who is responsible for payroll deductions.

3. Check consistency and full and final discharge

Ensure that the termination date, wording concerning WW benefits, cooling-off period and full and final discharge do not undermine the financial arrangements.