1. Introduction: What is a Settlement Agreement and Why is it Important
A settlement agreement is a crucial agreement between employer and employee that regulates dismissal by mutual consent. You are not obliged to sign a settlement agreement; this only happens by mutual consent. In this guide, you will learn what a settlement agreement entails, why it is important, and how to deal with it effectively.
This comprehensive guide covers everything you need to know: from basic definitions and key concepts to practical negotiation tips and frequently asked questions. A settlement agreement clearly sets out all the important agreements, such as those relating to compensation, notice periods and other conditions. Whether you have received a settlement agreement or want to prepare for possible termination of employment, this information will help you make the right decisions.
Settlement agreements are central to modern dismissal procedures because they offer advantages to both the employer and the employee. The employer and employee agree on the terms together, so that both parties have certainty and clarity about the agreements made. A settlement agreement is usually reached through negotiation and consultation between both parties. For employees, this often means retaining unemployment benefits, receiving a higher severance payment than is legally required, and avoiding lengthy legal proceedings. The severance pay in a settlement agreement can be negotiated and is often based on the subdistrict court formula. The most common use of a settlement agreement is for dismissal by mutual consent. However, an incorrect settlement agreement can have negative consequences for the right to unemployment benefits, so care must be taken when drawing it up.
Before signing a settlement agreement, it is important to carefully consider whether all agreements have been correctly and fully recorded.
2. Understanding Settlement Agreements: Key Concepts and Definitions
2.1 Basic Definitions
A settlement agreement is a written contract in which the employer and employee agree to terminate the employment relationship by mutual consent. A settlement agreement must clearly state that the dismissal is by mutual consent and that permission from the UWV (Employee Insurance Agency) is not required. This termination agreement replaces the normal rules for dismissal and offers both parties more flexibility. Agreements on competition and relationship clauses can be included in the VSO to increase opportunities in the labour market.
Related terminology you should know:
- Termination agreement: General term for agreements that terminate an employment contract
- Dismissal by mutual consent: Formal term for amicable termination
- VSO: Abbreviation for settlement agreement
- Transition payment: Statutory severance pay that the employer must always pay
Pro Tip: Understand what a settlement agreement means legally before negotiating its contents. You are not sick at the time you sign the settlement agreement to be entitled to unemployment benefits. You are entitled to unemployment benefits if your employer initiates the dismissal and there is no urgent reason for dismissal. It is not wise to sign a settlement agreement if you are ill within the first two years. Legal assistance can help you negotiate better terms in a settlement agreement.
2.2 Conceptual relationships
A settlement agreement combines various concepts from employment law:
- VSO → Retention of unemployment benefit: A correct VSO guarantees the right to unemployment benefit
- Mutual consultation → Higher compensation: Negotiation may result in severance pay above the statutory minimum
- Mutual consent → No dismissal permit: UWV procedure is avoided
- Written agreement → Legal certainty: All agreements are recorded and enforceable
- Notice period → Unemployment benefits: The termination date of your contract according to the notice period must be stated in the settlement agreement in order to secure entitlement to unemployment benefits. If no notice period or an insufficient notice period has been agreed, unemployment benefits may be at risk.
- Final settlement → Employer’s responsibility: The employer is responsible for providing a final settlement after signing the settlement agreement.
- Confidentiality obligation → Trust: A confidentiality obligation applies to both the employee and the employer in a settlement agreement.
3. Types of settlement agreements
There are different types of settlement agreements, depending on the situation in which the employer and employee find themselves. The most common form is the settlement agreement by mutual consent. In this case, both parties decide by mutual agreement to terminate the employment relationship, often with agreements on severance pay, the notice period and other conditions. This type of agreement is widely used in the case of dismissal by mutual consent, as it offers flexibility and avoids legal proceedings.
Another common situation is the settlement agreement upon termination of a temporary contract. When a temporary contract is terminated earlier than the agreed end date, a settlement agreement can provide clarity about the financial settlement, the remaining notice period and any additional agreements, such as payment for holiday leave or additional severance pay.
Finally, there are settlement agreements that are specifically drawn up for special situations, such as a reorganisation or a disrupted employment relationship. In all these cases, it is important that the agreements made are clearly laid down so that both the employer and the employee know where they stand. The type of settlement agreement helps determine which rights and obligations apply with regard to the dismissal, the severance pay and the right to unemployment benefits.
3. Why a settlement agreement is important in employment law
Settlement agreements have become essential in the Dutch labour market. According to UWV statistics, 85% of employers use a settlement agreement in the event of dismissal for economic reasons, because it is faster and cheaper than the subdistrict court procedure. A settlement agreement is often used to avoid formal dismissal procedures, so that employees do not have to be dismissed via the UWV or the subdistrict court.
Key benefits for employees:
- Retention of unemployment benefits without a waiting period
- Often higher severance pay than the statutory minimum
- Clarity about the end date and transitional arrangement
- Possibility to negotiate terms and conditions
- Positive reference and references
- Confidentiality applies to both employee and employer, ensuring mutual trust and discretion.
Advantages for employers:
- Avoidance of lengthy dismissal proceedings
- No risk of a magistrate’s court ruling
- Lower costs than regular dismissal via the UWV
- Maintenance of good working relationship
- Avoiding dismissal proceedings saves time and money
In practice, settlement agreements are mainly used in the event of reorganisations, disrupted working relationships, and situations where the employer considers that continuation is not possible. The settlement agreement sets out the agreements made regarding the termination of employment.
5. Right to unemployment benefit
One of the most important points to consider when signing a settlement agreement is retaining the right to unemployment benefits. To be eligible for these benefits, a number of conditions must be met. Firstly, the settlement agreement must have been reached by mutual consent. This means that both the employer and the employee have agreed to the termination of the employment relationship.
In addition, it is essential that the initiative for the dismissal lies with the employer. The employee may not resign themselves, as this would result in the loss of their right to unemployment benefits. Nor may there be any urgent reason for dismissal, such as serious culpable conduct. Finally, the employee must meet the general legal requirements for unemployment benefits, such as sufficient employment history and availability for the labour market.
If these conditions are met, the employee retains the right to unemployment benefits after signing the settlement agreement. It is therefore important to carefully check the wording of the agreement and, in case of doubt, always seek legal advice.
6. Urgent reason and settlement agreement
Urgent cause can have major consequences for the right to unemployment benefits and the possibility of concluding a settlement agreement. Urgent cause is understood to mean: serious misconduct or negligence on the part of the employee, such as theft, fraud or repeated failure to fulfil the obligations under the employment contract. In such cases, the employer may dismiss the employee without entitlement to severance pay or unemployment benefits.
A disrupted working relationship can also be considered an urgent reason, especially if the situation cannot be remedied. Sometimes a commercial reason is cited as grounds for dismissal, but this is not usually an urgent reason within the meaning of the law. It is important that the settlement agreement clearly states that there is no urgent reason, so that the right to unemployment benefits is retained.
If an employer dismisses an employee for an alleged urgent reason, it is wise to seek legal advice immediately. This will allow an assessment to be made as to whether the dismissal is justified and whether it is still possible to reach a settlement agreement that guarantees the right to unemployment benefits.
7. Summary dismissal and settlement agreement
Summary dismissal is an exceptional and drastic measure whereby the employer dismisses the employee with immediate effect, without notice. This usually occurs in cases of very serious misconduct on the part of the employee. Unlike dismissal by mutual consent, a settlement agreement cannot be used to arrange summary dismissal. This is because summary dismissal is a unilateral decision by the employer.
If an employee disagrees with the summary dismissal, he or she can go to court to challenge the dismissal. The court will then assess whether the dismissal was justified and whether the employer complied with the rules. In many cases, it is wise to seek legal advice immediately so that you know your rights and what steps you can take.
4. Key figures and comparison table
| Aspect | VSO | Regular Resignation | Resignation on the spot |
|---|---|---|---|
| Procedure duration | 2-6 weeks | 3-6 months | Immediate |
| Unemployment benefit | Immediate entitlement | Immediate entitlement | No entitlement (8-week waiting period) |
| Severance pay | Negotiable | Transition payment only | None |
| Notice period | Agreed end date | Statutory notice period | None |
| Employer costs | Low to average | High | Low |
| Legal certainty | High | Average | Low (risk of legal proceedings) |
Key figures for 2024:
- Average VSO redundancy payment: 2-4 months’ salary
- 92% of employees retain unemployment benefits with a correct VSO
- Average negotiation time: 3-4 weeks
Please note: After signing a settlement agreement, employees are legally entitled to a two-week cooling-off period. During this cooling-off period, the employee can revoke the agreement without giving any reason.
5. Step-by-Step Guide to Dealing with a Settlement Agreement
Step 1: Preparation and Initial Assessment
What you need before you start:
- Employment contract and recent payslips
- Overview of accrued holiday entitlement and other rights
- Information about legal expenses insurance
- Any previous correspondence about performance or behaviour
Checklist for assessing a settlement agreement proposal:
- [ ] Is the end date realistic and does it suit your situation?
- [ ] Is the correct notice period being observed or compensated?
- [ ] Is the severance pay reasonable (compare with transition allowance)?
- [ ] Are all financial agreements clear (salary, holiday entitlement, bonuses)?
- [ ] Will your unemployment benefit be jeopardised?
- [ ] Check that all important points are included in the settlement agreement, such as agreements on notice period, compensation and other conditions.
Step 2: Negotiation and Optimisation
Negotiation strategy:
- Always seek legal assistance in complex situations
- Do not negotiate during illness unless absolutely necessary
- Use the employer’s weak reason for dismissal as a bargaining chip
- Demand transparency regarding the calculation of severance pay
- Discuss the non-competition clause and try to have it removed or limited
- Legal assistance can help you negotiate better terms in a settlement agreement. You can negotiate with the help of a solicitor or mediator.
- Always seek legal assistance in complex situations
- Do not negotiate during illness unless absolutely necessary
- Use the employer’s weak reason for dismissal as a bargaining chip
- Demand transparency regarding the calculation of severance pay
Recommended tools:
- Trade union for members
- Legal expenses insurance
- Specialised employment lawyer
- Online calculators for transition payments
- You are entitled to subsidised legal aid if you do not earn too much and do not have too much in savings.
Key negotiation points:
- Amount of severance pay (minimum transition allowance)
- Payment of, for example, holiday entitlement and accrued rights
- Non-competition clause (try to have this waived)
- Positive certificate and reference agreements
- Exemption during notice period
Step 3: Signing and cooling-off period
Check before signing:
- All agreements made are correctly stated
- Unemployment benefit is not affected by the wording
- End date and transitional arrangement are clear
- Non-competition clause is reasonable or absent
Legal cooling-off period:
- You have a statutory 14-day cooling-off period after signing
- This period cannot be shortened
- Use this time for legal review
- The cooling-off period does not apply to temporary contracts that end at a natural moment
10. Legal assistance with settlement agreements
It is strongly recommended that you seek legal assistance when negotiating, checking and signing a settlement agreement. A specialist solicitor or barrister can help you assess the terms and conditions, negotiate a higher severance payment or a more favourable notice period, and safeguard your right to unemployment benefit.
Legal assistance ensures that you will not be faced with any surprises and that all agreements in the settlement agreement are legally valid. In the event of a dispute with your employer, a solicitor can also represent your interests and represent you in court. This prevents you from losing important rights or agreeing to unfavourable terms. Many employees have (part of) the costs of legal assistance reimbursed by their employer, so always ask about this before signing the agreement.
6. Common mistakes to avoid
Mistake 1: Signing too quickly without legal advice Most employees underestimate the complexity of a VSO. Always have it checked by an expert, even if the proposal seems attractive. It is not wise to sign under pressure, as this can lead to unfavourable terms in the settlement agreement.
Mistake 2: Accepting a VSO during long-term incapacity for work During illness, you have extra protection. Do not accept a VSO without thoroughly investigating alternatives and your legal position.
Mistake 3: Skipping negotiations when the employer’s reason for dismissal is weak If the employer does not have an urgent reason or solid grounds for dismissal, you can often negotiate more than the initial proposal.
Mistake 4: Accepting a non-competition clause without compensation A non-competition clause limits your new job opportunities. Negotiate for its removal or financial compensation.
Pro Tip: Use the 14-day cooling-off period effectively by seeking legal advice and checking all aspects before you give your final agreement.
7. Practical example and walkthrough
Case Study: Employee increased severance pay by 40% through smart negotiation
Initial situation:
- Employee with 8 years of service
- Monthly salary: €4,500 gross
- Reason for dismissal: reorganisation (economic reasons)
- Employer’s initial VSO proposal: £18,000 severance pay
Negotiation strategy:
- Legal analysis showed that the transition payment amounted to €15,000
- Employer had insufficiently substantiated the reorganisation
- Employee had a strong employment relationship and performance
- Non-competition clause in proposal was unreasonably broad
Negotiation result:
| Aspect | Original proposal | Final result |
|---|---|---|
| Severance pay | €18,000 | €25,200 |
| Non-competition clause | 12 months | Expired |
| Exemption | None | 2 months paid |
| Outplacement | Not specified | €2,500 budget |
| Total value | €18,000 | £35,200 |
Key success factors:
- Thorough preparation and legal advice
- Exploitation of weaknesses in the employer’s argument
- Patience during negotiations (6-week process)
- Focus on total package, not just severance pay
8. Frequently asked questions about settlement agreements
Q1: Can I refuse a settlement agreement? A1: Yes, you can always refuse. An employer cannot force you to sign a settlement agreement. Refusal means that the employer must dismiss you through other channels or continue the employment contract. It is important to know why your employer wants to terminate your contract before the negotiations.
Q2: How long do I have to consider after signing? A2: You have a statutory 14-day cooling-off period during which you can revoke the signed settlement agreement without giving reasons. This period begins after both parties have signed.
Q3: What happens to my unemployment benefit in the event of a VSO? A3: With a correctly drafted VSO, you retain your full entitlement to unemployment benefit without a waiting period. The VSO must not suggest that the dismissal is at your initiative.
Q4: Can I negotiate all the terms and conditions in a VSO? A4: Yes, all terms and conditions are negotiable. Employers often present an initial proposal, but usually expect negotiation on aspects such as severance pay, end date and additional agreements.
Q5: What is a reasonable severance payment in a VSO? A5: At least the statutory transition payment. Depending on circumstances (strength of grounds for dismissal, years of service, salary), this can amount to 6-12 months’ salary if negotiated well.
Q6: Can an employer withdraw a VSO after I have agreed to it? A6: No, once both parties have signed, the agreement is binding. Only you have a 14-day cooling-off period, not the employer.
9. Conclusion: Key points to remember
A settlement agreement can be an excellent way to terminate your employment with dignity, provided you are well prepared. The five most important points to remember:
- Legal advice is essential – Have every VSO checked by a specialist before signing
- Use your cooling-off period – 14 days’ cooling-off period is there to help you make good decisions
- Retain your unemployment benefit rights – Ensure that the wording does not jeopardise your benefits
- Negotiate actively – The first proposal is rarely the best possible
- Look at the total package – Not just severance pay, but also exemption, references and other conditions
Next steps:
- Have you received a VSO? Seek legal advice within 48 hours
- Are you considering resigning? Find out about your rights and options in advance
- Want to prepare? Document your performance and keep important correspondence
Viewing a settlement agreement as an opportunity rather than a threat will help you achieve the best result for your specific situation. Seek assistance from the solicitors at Law & More.