SETTLEMENT AGREEMENT

Settlement agreement: what to look out for?

Table of contents

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Tips for assessing settlement agreement with a view to social security benefits Is your settlement agreement "Unemployment Act benefit-proof" and will you be eligible for Unemployment Act benefits?

Before signing a settlement agreement, it is always important to check whether the aspects mentioned in the agreement are in line with the applicable rules. For example, you may not be entitled to Unemployment Act or Sickness Act benefits if certain aspects are missing. This blog will provide several tips on what to look out for when, as an employee, you are offered a settlement agreement.

Dismissal at employer's initiative

It is important that the settlement agreement includes a statement that the initiative for the termination comes entirely from the employer. If this is not included, the Employee Insurance Agency may suspect that you are culpably unemployed. If there is culpable unemployment, you may lose the right to Unemployment Insurance Act benefits. Therefore, always check if it is included in any way that the initiative for termination lies with the employer. We often see the sections of text below named in the settlement agreement.

"The parties have decided to terminate the employment contract with effect from 1 June 2022, with the initiative for termination lying with the employer."
"Employer declares that termination of employment contract is not imputable to employee";
"The employer has proposed dismissal through this settlement agreement".

When the settlement agreement clearly states that the initiative comes from the employer, there is, in principle, the right to an unemployment benefit. Our specialist can assess whether that agreement is Unemployment Act benefit proof.

De hoogte van de transitievergoeding

In a settlement agreement, it is common for compensation to be offered by the employer. This is offered to make the transition to other work easier. It is often considered the reduced income over a period when a lower unemployment benefit (70-75%) or lower income is received from another employer.

A good indication of this severance payment, is the transitional allowance. This is the compensation you are entitled to when the Employee Insurance Agency grants a dismissal permit or the subdistrict court gives the employer permission to unilaterally terminate the employment contract. The amount depends on the length of employment and the level of salary. The longer the employment and the higher the salary, the higher the transitional allowance.

The transitional allowance does not have to be paid when agreeing a settlement agreement. However, this may be an indication of the amount of the severance payment. If employer and employee do not reach a settlement agreement, the dismissal will have to take place via the Employee Insurance Agency or the subdistrict court. In that case, you will be entitled to the transitional allowance. If you cannot reach an agreement with the employer on severance pay and the company still wants to get rid of you, you will be entitled to the transitional allowance.

It is therefore wise to agree to a severance payment only when it amounts to at least the transitional allowance. There are several online tools to calculate your transitional allowance, including on our page about transitional allowance.

Non-competition clause or non-solicitation clause

A settlement agreement often includes a clause prohibiting you from working for competitors within a certain period of time. This is done with the aim of preventing unfair competition. If you start working for a competitor of your ex-employee immediately after your work, you may pass on trade secrets to the competitor. This may put the ex-employee at a great disadvantage.

In principle, it is possible to include this non-competition clause in a settlement agreement. It is also form-free, so the company itself may determine the terms. For example, you may be allowed to work for a competitor, may not be allowed to sign up clients of the ex-employee with your new employer (non-solicitation clause).

The fact that the clause is form-free does not mean that the employer can include anything it wants. By law, such a clause must be reasonable. When it is reasonable is determined by the court. A non-competition clause for six months in the same city is reasonable, but for the duration of ten years applying to the whole of the Netherlands is not reasonable. The court will have to look at this on a case-by-case basis. If it is determined that the clause is not reasonable, it can be annulled in whole or in part.

In addition, the non-competition clause must have been agreed with an adult employee in the case of an employment contract of indefinite duration. Including a clause in a fixed-term contract is allowed, but only if there are compelling business or service interests.

Reason for dismissal

A settlement agreement should always include the reason for submitting the settlement agreement. This could be a difference of opinion or a business reason, for example. There may not be an urgent reason, such as theft or discrimination. If this turns out to be the reason for the settlement agreement, the UWV may determine that you are culpably unemployed. This may invalidate your entitlement to unemployment benefit.

Exemption from work or continued employment

When a settlement agreement is offered, there are two options in performing work until the end date of the employment contract.

These are the next two:

You continue to work: the employer expects you to continue performing work within the company until the end of employment.
You will be exempt from work: you do not have to come to the company from the time of signing the settlement agreement until the end date of employment. So you will be exempted from the work you normally do.

It is important to always check what has been agreed in the settlement agreement so that there are no surprises. If you are released from work but your leave days are deemed to be taken at the end of employment, there is room for negotiation here.

Level of statutory notice

In case of dismissal, the employer has to take into account the statutory notice period. If the employment contract is terminated by means of a settlement agreement, this notice period does not formally apply. However, the Employee Insurance Agency states that the "notional notice period" does need to be taken into account for entitlement to unemployment benefits. During this period, there is a right to continued wage payment.

To be entitled to Unemployment Act benefits, the employer must observe the notional notice period. The length of the term is shown below:

Length of employment	Term of notice
Less than 5 years	1 month
5 to 10 years	2 months
10 to 15 years	3 months
More than 15 years	4 months

It is possible to deviate from this notional notice period by mutual agreement with the employer. The reason for agreeing on a shorter term, for example, is if you think you can get a job earlier. After all, you may also join a new employer only after the notice period has expired.

Then pay attention! Entitlement to Unemployment Act benefits only exists after the term that is included above. Suppose you have a four-month notice period, but mutually agree to shorten the term to two months. Then the right to Unemployment Act benefits only exists after the four months, not already after those two months. Always check that the agreed notice period is correct.

Occupational disability

When you are ill and want to get rid of your job, signing a settlement agreement seems like an easy solution. But: never sign a settlement agreement when you are unfit for work. This may in fact mean that the right to sickness benefit will lapse. In fact, a dissolution of the employment contract due to illness can only be realised by the employer once the employee has been ill for two years.

If a settlement agreement is signed before these two years, you will miss out on wages. The Employee Insurance Agency may then argue that this is an 'act of detriment', and you are culpably unemployed. This could result in the loss of your right to sickness benefit. Make sure you are 100% fit for work before signing a settlement agreement.

Reflection period for settlement agreement

A settlement agreement should also always include a reflection period. This means that you have fourteen days after signing the settlement agreement to dissolve the agreement. This can be done without giving reasons.

The purpose of this is to be able to gather legal assistance even after signing the agreement. In fact, if you sign the settlement agreement without legal assistance, it can work very much to your disadvantage. After all, you do not always know exactly what you have signed and whether everything is correct. It could also happen that you become unfit for work after signing. In that case, you can dissolve the settlement agreement within fourteen days, again without giving reasons.

So the reflection period is at least 14 days and should be included in the settlement agreement. If it is not included, a notice period of 21 days applies. So even if this term is not included in the agreement, it (fictionally) does exist. So it is always worth checking whether the reflection period is included in the agreement.

Fixed-term contract

Finally, the settlement agreement in the case of a fixed-term employment contract. In principle, the fixed-term employment contract may not be terminated and the right to an unemployment benefit only arises from the date on which the employment contract would end.

An exception to this rule is when a so-called "early termination clause" has been agreed. If the employment contract stipulates that it may be terminated early, it is possible to terminate the employment contract through a settlement agreement.

However, there are solutions for getting out of the employment contract by means of a settlement agreement, without an interim notice clause. If you are in a similar situation, the lawyers of Arbeidsjurist Eindhoven are ready to advise you in this legal matter.

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