1. Introduction: What is a Settlement Agreement and Why is it Important
A settlement agreement is a crucial agreement whereby the employer and employee mutually terminate the employment contract by mutual consent. In this guide, you will learn what a settlement agreement is, why it is important, and how you can negotiate optimally for the best terms.
A settlement agreement can be seen as a contract that sets out all the arrangements for the termination of employment. It is important to review this agreement carefully so that you fully understand the terms and implications before agreeing to it.
This agreement, also known as a termination agreement or VSO, offers an alternative to lengthy dismissal proceedings through the subdistrict court or UWV. For employees, this often means retaining their unemployment benefits, but also the possibility of a higher severance payment than is legally required.
In this article, we will discuss:
- Key concepts and definitions of settlement agreements
- Step-by-step plan for optimal negotiations
- Advantages and disadvantages versus regular dismissal procedures
- Practical examples and common mistakes
- Frequently asked questions with concrete answers
2. Understanding settlement agreements: Key concepts and definitions
2.1 Key definitions
A settlement agreement is a written agreement in which the employer and employee make arrangements regarding the termination of employment. The settlement agreement sets out all the arrangements made between the employer and employee in writing in order to provide legal certainty. Unlike summary dismissal or dismissal through regular procedures, this is done through mutual consultation. The settlement agreement must state that your employer is taking the initiative for your dismissal.
Important synonyms you may encounter:
- Termination agreement: official term in employment law
- VSO: abbreviation for settlement agreement
- Dismissal by mutual consent: describes the basis of the agreement
Pro Tip: Before you learn how to negotiate, it is essential that you understand what a settlement agreement means legally. It is not a normal dismissal, but an agreement that both parties must sign.
2.2 Related Concepts
A settlement agreement relates to other labour law procedures as follows:
- Settlement agreement → retention of entitlement to unemployment benefit → faster process than magistrate’s court
- Regular dismissal → UWV procedures → longer processing time → possibly no transition payment
- Summary dismissal → urgent reasons required → loss of unemployment benefit entitlement → no severance pay
- Important:Â If the employer does not meet the conditions for unemployment benefit, this may affect your entitlement to that benefit.
In the case of dismissal by mutual consent, no permission is required from the UWV or the subdistrict court.
Opting for a settlement agreement prevents unnecessary procedures and gives both parties certainty about the end date and financial arrangements. With a settlement agreement, your employer does not need to apply for a dismissal permit from the UWV.
3. Why Settlement Agreements in Mutual Termination are Important in Employment Law
Settlement agreements play a crucial role in Dutch employment law because they offer advantages for both the employer and the employee. Research shows that approximately 70% of employers opt for a settlement agreement to avoid lengthy proceedings.
Key benefits for employees:
- Retention of unemployment benefit (no culpable unemployment)
- Possibility of severance pay other than the statutory minimum
- Quick certainty about end date and conditions
- Often a positive reference as part of the agreement
Under certain conditions, a settlement agreement entitles employees to unemployment benefits and offers legal protection. This is also referred to as ‘settlement agreement rights’. The agreement confirms the legal situation surrounding the dismissal and ensures that the right to benefits and other employment rights are retained, provided that the correct conditions are met.
Benefits for employers:
- Avoidance of costly proceedings before the subdistrict court
- No assessment by the UWV in the event of commercial reasons
- Certainty about definitive termination of employment contract
- Possibility of customised agreements
In practice, most employees receive a settlement agreement in the event of reorganisations, disrupted working relationships, or when the employer considers that the position no longer fits in with the business operations.
4. Comparison table of advantages and disadvantages
| Aspect | Settlement agreement | Regular dismissal |
|---|---|---|
| Processing time | 2-6 weeks | 3-6 months |
| Unemployment benefit entitlement | Retained | Depending on reason for dismissal |
| Severance pay | Negotiable | Transition payment mandatory |
| Procedure | Mutual consultation | Via UWV/subdistrict court |
| Certainty | High (mutual agreement, only legally valid if signed by both parties) | Uncertain (review by third parties) |
| Cost | Low | High (legal proceedings) |
| Reflection period | 14 days | Not applicable |
5. Step-by-step plan: How to deal with a settlement agreement in the best possible way
Step 1: Assess and prepare
When you receive a settlement agreement, take the following steps:
Checklist for initial assessment:
- Read the proposal thoroughly before responding
- Check whether you are given sufficient time to consider (at least 14 days)
- Determine whether you are currently ill (signing a settlement agreement while ill may affect your benefits)
- Assess your financial situation and future plans
Please note: Signing a settlement agreement during illness or incapacity for work may have adverse consequences for your entitlement to benefits. Be extra cautious and make sure you are well informed before signing.
Example scenario: You receive a settlement agreement proposal on Friday with a request to sign on Monday. This is unacceptable – you are entitled to at least three weeks’ consideration time from receipt.
When you should NOT sign:
- During long-term incapacity for work
- Under time pressure without adequate time to consider
- Without legal assistance in complex situations
- When in doubt about the fairness of the proposal
Step 2: Negotiate and Optimise
Effective negotiations start with good preparation. In a settlement agreement, there is often room for negotiation on the terms and conditions, such as compensation, notice period and other agreements. It is wise to seek legal assistance to strengthen your negotiating position.
Negotiation points:
- Severance pay:Â Ask for more than the transition allowance (standard: 1/3 monthly salary per year of service)
- Notice period:Â Negotiate a short notice period versus payment
- Exemption:Â Negotiate an exemption to look for a new job
- Non-competition clause:Â Try to have this waived or shortened
- Holiday entitlement:Â Ensure full payment for remaining days
Recommended support:
- Legal assistance via trade union or employment lawyer
- Calculation tool for fair severance pay
- Comparison with similar cases in your industry
There are often legal costs associated with a settlement agreement, but these costs may be reimbursed by the employer.
Pro Tip: Do not start negotiations with the highest amount, but with realistic arguments based on your value to the company and market conditions.
Step 3: Signing and follow-up
After agreeing on the terms:
Before signing the settlement agreement, it is important that you only agree if all terms are clear and acceptable. This prevents misunderstandings and ensures that you agree to what has actually been agreed upon.
Before signing, check the following:
- All agreements made are correctly described
- End date and correct notice period are stated
- Unemployment benefit is secured (no culpability)
- Payment schedule is clear
The employer must apply the statutory notice period in the settlement agreement.
- All agreements made are correctly described
- End date and correct notice period are stated
- Unemployment benefits are secured (no culpability)
- Payment schedule is clear
After signing:
- Keep the signed settlement agreement in a safe place
- Register with the UWV for unemployment benefits in good time
- If necessary, start looking for a new job
- Follow agreements made about certificates and references
Metrics for success:
- Unemployment benefits granted without any problems
- Severance pay at least equal to transition allowance
- Timely payment in accordance with agreements
- Positive reference received
6. Entitlement to unemployment benefits after a settlement agreement
One of the main concerns for employees who receive a settlement agreement (VSO) is retaining their right to unemployment benefits. Fortunately, with the right agreements in the agreement, you can secure your unemployment benefits, provided you pay close attention to a number of crucial points.
Firstly, it is essential that the settlement agreement clearly states that the initiative for the dismissal lies with the employer. This prevents the UWV from viewing the termination of employment as ‘culpable unemployment’, which would jeopardise your right to unemployment benefits. Resignation by mutual consent is only safe for unemployment benefits if the employer takes the initiative and there is no urgent reason or culpable behaviour on your part.
In addition, pay close attention to the correct notice period. The settlement agreement must take into account the statutory or contractual notice period. If this period is too short or missing, the UWV may apply a so-called fictitious notice period. This means that your unemployment benefits will only start after this period has expired, which could leave you temporarily without income. Therefore, always check that the end date of the employment contract and the notice period are correctly stated in the agreement.
It is also important that all agreements made, such as the amount of the severance pay, the payment of outstanding holiday days and the exact end date, are clearly recorded in writing. Incomplete or unclear agreements can lead to problems later on when applying for unemployment benefits.
Have you received a settlement agreement? Then always contact the UWV to check your entitlement to unemployment benefits. It is wise to seek legal assistance, for example through a trade union, legal expenses insurance or an employment lawyer. They can assess whether the agreement meets all the requirements and whether your entitlement to unemployment benefits is at risk.
Finally, a well-drafted settlement agreement by mutual consent does not have to be an obstacle to receiving unemployment benefits. In fact, it can be a practical solution to avoid unnecessary procedures and guarantee your financial security. Make sure you have all agreements in writing so that you do not encounter any surprises.
6. Common mistakes in settlement agreements
Mistake 1: Signing too quickly without legal assistance Employees often sign out of emotion or time pressure. You only sign a settlement agreement once – take the time to assess it thoroughly.
Mistake 2: Signing while on sick leave Signing while on sick leave can lead to loss of sick pay and complications with unemployment benefits. Wait until you have recovered or seek specific legal advice.
Mistake 3: Not negotiating the severance pay The first proposal is rarely the best. Employers often expect negotiations and have room for better terms.
Mistake 4: Forgetting remaining holiday days Ensure that all financial entitlements (e.g. holiday days, end-of-year bonus) are explicitly arranged in the agreement.
Pro Tip: Always ask critical questions and do not let yourself be pressured. A reliable employer will give you time to make a well-considered decision.
7. Practical example and walkthrough
Case Study: Employee Jan obtained a 50% higher severance payment through smart negotiations
Initial situation:
- Jan (45 years old, 8 years of service) receives VSO proposal due to reorganisation
- Monthly salary: € 4,500 gross
- Initial proposal: € 12,000 severance pay (minimum transition payment)
Steps taken:
- Week 1:Â Jan contacted the trade union for legal support
- Week 2:Â Analysis of his value: specialist knowledge, long service, difficult to replace
- Week 3:Â Negotiations focused on:
- Higher severance pay (€ 18,000)
- Outplacement budget (€ 2,500)
- Exemption from working the last month to look for a new job
- Positive reference
Final results:
- Severance pay: € 18,000 (50% higher than the original proposal)
- Outplacement: € 2,500 budget for career guidance
- Unemployment benefit:Â Fully retained from day 1
- New job:Â Found within 3 months thanks to exemption and outplacement
When an employee enters into a settlement agreement, the employee often receives severance pay and retains the right to unemployment benefits, as in Jan’s example. If an employee resigns, the employee does not receive severance pay and is usually not entitled to unemployment benefits. It is therefore important to negotiate the terms carefully so that the employee receives what they are entitled to.
| Aspect | Original proposal | Final result |
|---|---|---|
| Severance pay | € 12,000 | € 18,000 |
| Outplacement | € 0 | €2,500 |
| Exemption | No | Last month |
| Total value | € 12,000 | € 20,500 |
8. Frequently asked questions about settlement agreements
Question 1: Can I refuse a settlement agreement?
Yes, you are never obliged to sign a settlement agreement. Refusal means that the employer must follow other dismissal procedures via the UWV or the subdistrict court, which often takes longer. In the case of formal termination by the court, it will be examined whether the request is justified and whether either party is at fault.
Question 2: Do I retain my right to unemployment benefits after signing?
Yes, with a correctly drafted settlement agreement, you retain your right to unemployment benefits. The UWV does not consider this to be culpable unemployment because it is by mutual consent. It is important that the agreement does not state that you are culpably unemployed, because then your unemployment benefit may be refused. To be entitled to unemployment benefit, there must be no urgent reason for dismissal, such as theft.
Question 3: Can I sign a VSO during illness?
Technically, yes, but this is strongly discouraged. During illness, you are protected against dismissal, and signing the agreement may have consequences for your sickness benefit and incapacity benefit. If you sign the settlement agreement while you are ill, you will not be eligible for unemployment benefits.
Question 4: How do I calculate a fair severance payment?
The transition allowance (1/3 of your monthly salary per year of service) is the legal minimum. A fair severance payment takes into account your age, years of service, salary and chances of finding a new job. Seek legal assistance for a realistic estimate.
Question 5: Does the cooling-off period also apply to temporary contracts?
Yes, the minimum cooling-off period of 14 days also applies to temporary contracts that are terminated prematurely via VSO.
Question 6: What happens if I change my mind during the cooling-off period?
You can revoke the settlement agreement in writing within 14 days without giving reasons. Please note: if you have already revoked a VSO within the previous 6 months, this right will lapse.
Question 7: When is the court involved in a settlement agreement?
The court is not usually directly involved in drawing up or signing a settlement agreement. A court only becomes involved if the parties cannot reach agreement or if a formal termination of the employment contract is requested. In that case, the court assesses the request and considers whether either party is at fault, and then officially confirms the decision.
9. Conclusion: Key points
The 5 most important points about settlement agreements:
- Always take sufficient time to consider – Haste is a poor advisor when making decisions that affect your career
- Negotiate all terms and conditions – The first proposal is rarely the best, so don’t forget to ask for a higher severance payment
- Ensure you retain your unemployment benefit – Check that the agreement does not create any culpability
- Seek professional support – Legal assistance from a trade union or solicitor prevents costly mistakes
- Document all agreements made – Ensure that all commitments are set out in writing in the settlement agreement
Next steps: If you have received a settlement agreement, contact your trade union or an employment lawyer for professional guidance. Never sign under time pressure and make sure you understand all the terms and conditions before signing.
A well-negotiated settlement agreement can make the difference between a stressful transition and an opportunity for a fresh start with financial security. Invest in good preparation – it almost always pays off.