Employers who dismiss an employee after two years of incapacity for work can currently reclaim the statutory transition payment from the UWV (Employee Insurance Agency), subject to conditions. This scheme, however, appears to be coming to an end. The government has announced a new bill to abolish the compensation scheme, meaning employers will become fully responsible for these costs themselves from 2027 onwards. Compensation for business closure due to the employer’s retirement or death will also disappear.
The proposed change is part of a broader overhaul of the transition payment system. Although the bill still needs to be considered by parliament, it is wise for employers to already take the possible consequences into account.
How is the scheme currently structured?
When an employee has been unfit for work for longer than two years, the employer can terminate the employment. In that case, the employee is, in principle, entitled to a transition payment. Since 2020, employers have been able to reclaim this payment from the UWV through the compensation scheme for long-term incapacity for work.
This scheme was introduced to counter an undesirable effect of the transition payment. Employers regularly kept long-term sick employees formally employed to avoid paying the transition payment. Because the employment contract had, in practice, become an empty shell, this became known as a “dormant employment contract” (slapend dienstverband).
In the Xella ruling, the Dutch Supreme Court held that an employer must, in principle, cooperate in terminating a dormant employment contract when the employee requests this. In doing so, the employer must pay the statutory transition payment. The ability to recover this payment through the UWV played an important role in that ruling.
In addition to the scheme for long-term incapacity for work, a compensation option currently also exists for small employers who close their business due to retirement or death.
What does the government want to change?
The government wants to abolish both compensation schemes. This would end the ability to recover transition payments paid in these situations from the government.
Initially, the plan was only to exclude medium-sized and large employers from compensation for dismissal due to long-term incapacity for work. The government has since announced it wants to go further. Under the proposed change, compensation would disappear for all employers, regardless of the size of the business.
This means employers who part ways with an employee after two years of illness will have to pay the full transition payment themselves. Small employers closing their business due to retirement or death will also no longer be able to claim compensation.
Uncertainty about dormant employment contracts
The proposed abolition immediately raises the question of what consequences this will have for case law on dormant employment contracts.
The obligation arising from the Xella ruling is, after all, partly based on the existence of the compensation scheme. If that compensation disappears, it is doubtful whether the same obligation will continue to apply unchanged. The legislature has not yet provided definitive clarity on this point.
Various advisory bodies have also drawn attention to this issue. Both the Council of State and the Council for the Judiciary have pointed out that abolishing the compensation scheme could lead to more legal proceedings and new disputes over the position of long-term incapacitated employees.
When will the changes take effect?
The original intention was for the new rules to take effect on 1 July 2026. This has since been postponed. The intended effective date is now 1 January 2027.
The bill still needs to be considered by both the House of Representatives and the Senate, however. Until the law is actually adopted and takes effect, the current compensation schemes remain in force.
What does this mean for employers?
If the bill is adopted, employers will face higher costs when dismissing long-term incapacitated employees. The transition payment will still be owed but will no longer be compensated by the UWV.
In addition, it remains unclear for now what consequences the legislative change will have for the obligation to cooperate in terminating dormant employment contracts. Employers would therefore do well to closely follow the progress of the bill.
For organisations with long-term sick employees, or small business owners planning to close their business in due course, the proposed abolition of the compensation schemes can have significant financial consequences. Timely preparation and legal advice can be of great importance.
Do you have questions about the consequences of this legislative change for your organisation? Please contact our employment lawyers.
