Dutch Employment Termination Payment Explained

When an employment contract ends, the financial side of things can be a major source of stress. In the Netherlands, there's a specific safety net in place called the transitievergoeding, or transition payment. It’s a legally required severance payment designed to help employees bridge the gap between their old job and their next one.

What Is a Dutch Employment Termination Payment?

Losing a job often feels like being thrown into a maze without a map. In the Netherlands, one of the most important signposts to look for is the transitievergoeding. This isn't just a courtesy payment or a simple handshake from your employer; it's a legal right with a very clear purpose.

Think of it as a financial bridge. The payment is there to give you a monetary cushion, making it easier to move from one job to the next. It’s a formal acknowledgement of the disruption that termination causes and is intended to support you, whether you use it for retraining, upskilling, or simply covering your expenses while you search for a new role.

The Foundation of the Transition Payment

This system is a fairly recent addition to Dutch employment law. On 1 July 2015, the government introduced this requirement as part of a major overhaul of dismissal law, known as the Wet werk en zekerheid (Work and Security Act – WWZ). The big idea was to make dismissals fairer while giving employees concrete resources to help them get back on their feet.

This change marked a significant shift. It moved away from complex, often fault-based compensation systems and towards a universal right for nearly every employee facing an involuntary job loss. The law established a clear, formula-based entitlement that applies from the very first day of employment.

When Are You Entitled to This Payment?

Understanding exactly when this payment kicks in is crucial for both employers and employees. As a general rule, you're entitled to a transition payment whenever your employer is the one to initiate the end of your contract.

Before we get into the details, let's look at the most common scenarios where a transition payment is owed. The following table breaks down when the law is typically on your side.

When You Are Entitled to a Transition Payment

Scenario	Description	Is a Payment Generally Owed?
Contract Termination	Your employer ends your permanent or fixed-term contract via the UWV or the courts.	Yes
Non-Renewal of Fixed-Term Contract	Your employer decides not to offer a new contract when your temporary one expires.	Yes
Employee Resignation (Due to Employer)	You resign because of seriously culpable actions from your employer (e.g., harassment).	Yes, in specific cases.
Mutual Agreement	You and your employer agree to part ways via a settlement agreement (vaststellingsovereenkomst).	Often, but it’s negotiated.
Dismissal During Probation	Your employment is terminated during your probationary period.	No
Dismissal for Urgent Cause	You are dismissed with immediate effect for a serious reason (e.g., theft).	No

As you can see, the entitlement hinges on who makes the decision to end the employment.

The transition payment is fundamentally about providing support after an employer-led decision to end the employment relationship. It ensures that employees are not left without financial means to re-enter the workforce.

In short, the transitievergoeding acts as a standardised safety net. It creates a much more predictable and transparent process than the older, more complicated severance arrangements. By understanding its purpose and the conditions that trigger it, you can navigate the end of an employment contract and plan your next professional steps with far more confidence.

How to Calculate Your Transition Payment

Figuring out your transitievergoeding might seem like a daunting task, but the formula behind it is surprisingly straightforward. It all comes down to two simple things: your gross monthly salary and how long you’ve worked for the company. The law lays out a clear structure, which brings a welcome level of fairness and predictability for everyone.

Think of it like building a tower with blocks. Every year of service is another block, and your salary determines how big that block is. The more blocks you have, and the bigger they are, the taller your final tower—your transition payment—will be.

The rule of thumb is that for every full year you’ve worked, you build up one-third of your gross monthly salary. This starts from your very first day, so every bit of time you've put in counts towards the final amount.

What Is Included in Your Gross Monthly Salary

Before you start crunching the numbers, you need a clear picture of what "gross monthly salary" actually means. It’s not just your basic paycheque; the figure is meant to capture your total regular earnings to give a true representation of your income.

Several key components are rolled into this calculation:

• Your basic gross monthly wage. This is the starting point, the core amount you earn before anything is taken out.

• The holiday allowance. In the Netherlands, this is typically 8% of your annual salary, and its pro-rata monthly portion is always included.

• Fixed bonus payments. If your contract guarantees a 13th-month payment or a set year-end bonus, its monthly equivalent gets added to the pot.

• Shift allowances and overtime pay. Any consistent, structural payments for working odd hours or regular overtime are also factored in.

Essentially, if it's a consistent, contractual part of your earnings, it counts. Variable, performance-based bonuses usually don't make the cut unless they have been paid out so consistently over time that they've become a predictable part of your income.

The whole point is to create a fair and accurate snapshot of what you earn each month. By including these fixed allowances and bonuses, the calculation ensures your transition payment reflects your full regular income, not just the number at the top of your payslip.

Getting this figure right is the first crucial step. Once you've nailed down your accurate gross monthly salary, you're ready for the next part of the equation: your length of service.

Putting the Calculation into Practice with Examples

The best way to get your head around the formula is to see it in action. Let’s walk through a couple of real-world scenarios to see how the employment termination payment is calculated for different employees.

Example 1: A Marketing Manager

• Gross Monthly Salary (including holiday pay & bonuses): €4,500

• Length of Service: 4 years and 6 months

First, we tackle the full years. The manager has 4 full years of service.

• Payment for full years = 4 years × (1/3 × €4,500) = 4 × €1,500 = €6,000

Next, we calculate the payment for the leftover bit—the 6 months. This part is done pro-rata.

• Payment for partial year = (€4,500 / 12 months) × 6 months × (1/3) = €375 × 6 × (1/3) = €750

Finally, we just add the two results together for the grand total.

• Total Transition Payment: €6,000 + €750 = €6,750

Example 2: A Senior Developer

• Gross Monthly Salary (including holiday pay & bonuses): €7,200

• Length of Service: 11 years and 3 months

We use the exact same process for this long-serving employee.

• Payment for full years = 11 years × (1/3 × €7,200) = 11 × €2,400 = €26,400

• Payment for partial year = (€7,200 / 12 months) × 3 months × (1/3) = €600 × 3 × (1/3) = €600

• Total Transition Payment: €26,400 + €600 = €27,000

As you can see, the process is methodical. By breaking it down into full years and then the remaining months, you can get a very accurate estimate of what you're entitled to. For a closer look at how this all fits within your contract, you can explore more about transition compensation for an employment contract on our blog. This clarity gives you the power to check any offer from your employer and make sure you receive the correct amount.

Navigating Dutch Taxes on Your Payment

Receiving a significant termination payment is a huge relief, but it’s vital to understand how it’s going to be taxed. In the Netherlands, this isn't a tax-free windfall. Your payment is generally treated as regular income, meaning the tax authorities will take their slice before it ever hits your bank account.

This can be a bit of a shock if you aren't prepared for it. Think of your annual income like a container being filled with water. Your salary fills it to a certain level month by month. The termination payment is like pouring a massive bucket of water in all at once, pushing the level into a much higher tax bracket.

Getting your head around this process is key to forecasting what you’ll actually receive and avoiding any nasty financial surprises. Let’s break down how the Dutch tax system handles these lump-sum payments.

The Impact of Box 1 Progressive Taxation

In the Dutch tax system, most of your income from work falls into what’s called Box 1. This box works on a progressive scale—the more you earn, the higher the percentage of tax you pay on any additional income. Your termination payment gets added right on top of your other Box 1 income for the year, like your regular salary.

The effect is significant. If that payment pushes your total annual income into a higher tax bracket, a large portion of it will be taxed at that higher rate. For 2024, the tax rates in Box 1 are:

• Up to €75,518: Taxed at 36.97%

• Above €75,518: Taxed at 49.50%

This progressive structure is why the gross amount of your settlement can look very different from the net amount you end up with. By law, your employer must withhold these taxes (loonheffing) before paying you, treating it just like they would a large one-off bonus.

Your termination payment isn’t taxed separately; it's lumped in with your total yearly income. This aggregation is what can trigger a higher tax rate, seriously impacting your final take-home amount.

Understanding this is the first step, but thankfully, there’s a specific Dutch tax rule designed to soften this very blow.

A Potential Tax-Saving Strategy: Middelingsregeling

Fortunately, the Dutch tax system offers a way to smooth out the impact of a sudden income spike. It’s called the middelingsregeling, which translates to an "income averaging scheme." This tool is designed for situations just like this, where your income fluctuates wildly over a three-year period.

The scheme lets you calculate the average of your Box 1 income across three consecutive years. You then figure out the tax you would have paid each year based on that average income. If the total tax based on the average is lower than what you actually paid, you could be eligible for a refund.

Here’s a simplified look at how it works:

1. Choose a Three-Year Period: You pick three consecutive calendar years. The year you receive your termination payment will naturally be the one with the high-income peak.

2. Calculate the Average: Add up your taxable income from Box 1 for all three years and divide the total by three.

3. Recalculate the Tax: For each of those three years, work out the tax you would have paid on the average income figure.

4. Compare and Claim: If the recalculated total tax is less than what you originally paid, you can claim back the difference (minus a small threshold amount).

This method can be a real game-changer, potentially saving you thousands of euros. Navigating these rules isn't always straightforward, and getting expert advice on international and national tax planning can provide clarity on whether this or other strategies are right for you. It helps ensure you don't overpay tax just because of a single, unusual income event.

Tax Rules for International Employees

When you've worked in multiple countries for the same employer, a termination payment can create a tricky tax puzzle. For expats and cross-border employees, figuring out which country has the right to tax your severance pay is a critical question. Thankfully, the Netherlands has specific rules to handle these international situations fairly, preventing the nightmare scenario of being taxed twice on the same income.

The core principle is actually quite simple: taxation rights are allocated based on where you physically did the work that earned you the payment. If your career with a company spanned several countries, your severance payment gets "sliced up," with each slice attributed to a country in proportion to your time there. This ensures the Netherlands only taxes the portion of the payment that relates to your work history within its borders.

This sensible approach prevents major fiscal headaches and aligns with international tax treaties designed to avoid double taxation. It gives globally mobile professionals the clarity they need when facing uncertainty about their financial obligations at the end of their employment.

A Key Policy Shift for Fairer Taxation

The method for calculating this allocation recently became much fairer. Previously, the Dutch tax authorities often used a default 12-month look-back period. This could create a distorted picture, especially if you had only recently moved to or from the Netherlands.

Recognising this wasn't always equitable, a significant policy update was made. As of 5 February 2022, the Dutch State Secretary of Finance amended the rules to consider an employee’s complete international employment history with their employer. This crucial change brings Dutch policy in line with OECD guidelines and the practices of treaty partners like Germany. You can discover more about how Dutch severance payments are handled in cross-border situations and the reasoning behind this important shift.

This means the calculation now reflects your entire tenure, providing a much more accurate basis for allocating taxing rights and dramatically reducing the risk of unfair tax outcomes.

The updated policy ensures that your severance pay is taxed based on the full scope of your international career with the company, not just a recent snapshot. This alignment with international standards is a major step forward for cross-border employees.

How Allocation Works in Practice

Let’s use a practical example to see how this works. Imagine an employee worked for a multinational corporation for a total of 10 years.

• First 6 years: She worked at the company's office in Germany.

• Final 4 years: She worked at the company's office in the Netherlands.

Upon termination, she receives a severance payment of €50,000. Under the updated Dutch rules, the taxation rights would be split like this:

1. German Portion: 60% of the payment (€30,000) is attributed to her time in Germany. Germany would generally have the primary right to tax this amount.

2. Dutch Portion: 40% of the payment (€20,000) is attributed to her time in the Netherlands. The Netherlands would have the right to tax this portion.

This proportional split ensures that each country only taxes the part of the payment earned within its jurisdiction. It’s a logical approach that gives international employees much-needed clarity and protection when navigating the end of their employment.

Avoiding the Excessive Payment Levy

While the transitievergoeding sets a clear baseline, employers navigating high-value terminations have another major hurdle to consider. This is especially true for executives or board members. There’s a significant financial trap you need to know about: the excessive severance payment levy.

Think of it as a ‘luxury tax’ on golden handshakes. The government introduced this rule to stop companies from handing out extraordinarily large severance packages. If a payment is deemed too generous, it triggers a steep penalty. Crucially, this isn't a tax on the employee; it's a direct levy on the employer, which can turn a carefully planned settlement into a huge, unexpected tax bill.

And when I say steep, I mean it. If a payment crosses the line into "excessive," the employer gets hit with a 75% tax on the portion of the payment that’s considered over the top.

When Does a Payment Become "Excessive"?

So, the million-dollar question is: when do the tax authorities consider an employment termination payment to be excessive? It all comes down to a specific test that compares the payment to the employee's recent earnings.

The first filter is the employee’s salary. For 2024, this levy generally isn’t a concern if the employee’s remuneration in the two calendar years before termination was under €672,000. If their earnings were above this threshold, then the severance payment gets a closer look to see if it’s reasonable. You can dig into the specifics of how this Dutch excessive severance payment levy works to understand the exact conditions.

This high-earner test means only payments to a small group of individuals are ever scrutinised. It’s one of several factors that push businesses to look for smart strategies for reducing payroll costs and optimising overall spending.

Structuring Agreements to Stay in the Clear

If you're dealing with a high-earner whose payment might attract scrutiny, how you structure the termination agreement is everything. The goal is simple: keep the total package within the boundaries defined by tax law.

The excessive payment levy is a powerful deterrent against golden parachutes that are out of proportion with an employee’s earnings history. Proactive planning is the only way to steer clear of this 75% penalty.

Before finalising any high-value severance deal, you absolutely must run the numbers. Calculate the employee’s historical remuneration and measure the proposed payment against the legal test to see if you’re at risk.

Here’s a quick checklist to help employers spot potential trouble.

Checking for the Excessive Severance Payment Levy

This table is a quick reference guide to help you assess whether a termination payment is at risk of triggering the 75% levy.

Condition	Explanation	Action Required
High Remuneration	Was the employee’s annual remuneration above the legal threshold (e.g., €672,000 in 2024) in the preceding two years?	If no, the levy likely won’t apply. If yes, you must proceed to the next check.
Payment Size	Does the proposed severance payment exceed the employee’s final year’s salary (adjusted for the period worked in the termination year)?	If yes, the payment is deemed excessive, and the 75% levy will apply to the excess amount.
Strategic Review	Is the package for a C-level executive or another highly compensated individual?	Always model the potential tax impact of the levy before finalising the settlement agreement. Don’t get caught by surprise.

By carefully working through these conditions, you can structure a termination agreement that is fair to the departing employee without accidentally handing over a massive sum to the tax authorities.

Navigating the Termination Process Step by Step

Ending an employment contract properly isn't just about signing a few papers. It’s a delicate process that demands a clear, structured approach, whether you're the employer or the employee. For employers, the focus is on compliance and watertight documentation. For employees, it’s about understanding your rights and knowing what to do next.

This journey often starts long before anyone says the word "termination." For employers, this means carefully building a dossier, especially if the issue is underperformance or an internal conflict. A well-documented file is your foundation if you need to go to the UWV (Employee Insurance Agency) for economic reasons or to court for personal ones.

When it comes to performance issues, it's common practice to first implement a structured improvement plan. There are helpful tools for performance improvement plans available that can guide you in creating a clear and fair framework.

The Employer’s Playbook

As an employer in the Netherlands, you have a few different paths you can take to end a contract. The right one always depends on the specific reason for the dismissal.

1. Mutual Agreement (Vaststellingsovereenkomst): This is nearly always the smoothest and most amicable route. You and the employee negotiate the terms of departure together, agreeing on the final day, severance pay (often in place of the statutory transition payment), and other conditions. It provides certainty for everyone and sidesteps lengthy, unpredictable legal battles.

2. UWV Dismissal Permit: If you’re letting someone go for economic reasons, like a restructuring or redundancy, you need permission from the UWV. This also applies in cases of long-term illness lasting more than two years. You'll need to build a solid business case to get the green light.

3. Court Dissolution: When the reasons are tied to the employee's personal conduct—think poor performance, culpable behaviour, or a seriously damaged working relationship—the path leads to the sub-district court. You must petition the court to dissolve the contract.

Each of these options comes with its own set of strict procedural rules. To make sure you're following the correct legal steps for your situation, it’s worth reading up on how to terminate employment in the Netherlands.

The Employee’s Response Guide

Being told your job is ending or receiving a settlement offer can be a shock. The most important thing is not to react immediately. Your first move should be to take a breath, understand what’s on the table, and get professional advice before you sign anything.

An initial settlement offer is just that—an offer. It is a starting point for negotiation, not a final command. You have the right to review it carefully and propose changes.

Here’s a quick checklist if you find yourself in this situation:

• Review the Proposal: Read every word of the settlement agreement. Look closely at the proposed termination date, the financial package, and any clauses about confidentiality or non-compete obligations.

• Analyse the Financials: Does the amount offered meet or exceed the statutory transition payment you’re legally entitled to? Double-check that the calculation is based on your correct salary and length of service.

• Seek Legal Counsel: This is almost always a smart move. An employment lawyer can spot unfavourable terms, tell you how strong your negotiating position is, and help you push for a better outcome.

• Negotiate the Terms: Don’t be afraid to ask for more. This isn't just about the severance payment; you can also negotiate things like your notice period, outplacement support, or getting a positive letter of reference.

Common Questions About Termination Payments

Navigating the details of an employment termination payment can bring up a lot of "what if" scenarios. Even once you have a solid grasp of the basics, unique situations often pop up that need more specific answers. This section tackles some of the most frequently asked questions to bring clarity to these real-world circumstances.

We'll clear up common points of confusion, from what happens if you decide to quit, to how your payment is affected if the company goes bankrupt. The goal is to resolve any lingering doubts you might have about your rights and obligations when it comes to the transitievergoeding.

Do I Get a Payment if I Resign?

Generally, the answer is no. The transition payment is really designed for situations where the employer is the one ending the contract. If you voluntarily hand in your notice, you typically give up your right to this specific compensation.

There is, however, one crucial exception. If you can prove that you were essentially forced to resign because of seriously culpable conduct by your employer, a court may rule in your favour.

Think of situations involving harassment, discrimination, or being forced to work in an unsafe environment. In cases like these, a court might not only award the standard transition payment but could potentially grant additional compensation as well.

What Happens if My Company Goes Bankrupt?

The thought of an employer declaring bankruptcy is incredibly stressful, but thankfully, there are protections in place for employees. When a company becomes insolvent, the UWV (Employee Insurance Agency) steps in to take over wage payment obligations through a special guarantee scheme.

This scheme covers any outstanding salary and, importantly, can also cover your transition payment. There are limits to what the UWV will pay out, though. It is absolutely vital that you file your claim with the UWV as soon as you learn of the bankruptcy to ensure you're included in the process and get the benefits you're owed.

Can My Employer Deduct Costs from My Payment?

Yes, but only under very specific and strictly regulated conditions. An employer is allowed to deduct certain costs from your transitievergoeding, but these deductions are limited to expenses that are aimed at helping you find a new job.

These costs fall into two main categories:

• Transitional Costs: This includes things like outplacement services, career coaching, or specific training designed to help you land a role at a different company.

• Employability Costs: These are costs for training or education that boost your broader employability, which were paid for during your employment.

For any deduction to be valid, it is essential to have prior written agreement with you. The expenses should not pertain to training solely connected to your previous role, and your explicit consent for their deduction from your final payment is required.

For further guidance, contact Law & More.