Netherlands: Which Bonuses Should be Included When Calculating the Statutory Transition Payment?
When an employer terminates an employment contract, Dutch labour law requires the payment of a statutory transition payment (in Dutch: transitievergoeding) equal to one-third of a monthly salary for each year of service. This also includes variable pay during the so-called reference period. For bonuses, the past three years are considered, and for commissions, the twelve months preceding the termination.
A recent court ruling clarified whether bonuses should be calculated based on amounts paid or amounts earned during the reference period. The Central Board of Appeal ruled that bonuses and commissions earned during the reference period must be included, regardless of when they were paid.
Statutory transition payment
When an employment contract is terminated on the initiative of the employer, the employer is required to pay the statutory transitional payment under Dutch Labour Law. This payment is equal to one-third of a month’s salary per year of service. Variable pay components, such as bonuses and commissions, are included in the salary calculation based on their respective reference periods: bonuses are averaged over the past three calendar years, and commissions over the twelve months preceding termination.
For some time, there was some debate about which bonuses and/or commissions should be included in the calculation of the transition payment; those earned or those paid out in the reference period.
For example, in a dismissal case in 2025, should the statutory transitional payment be calculated based on bonuses paid out in 2022, 2023, and 2024, or on bonuses earned during those years, even if they were paid later in 2023, 2024, or 2025? After all, bonuses are often paid out later than the year in which they were earned.
The chosen approach can have significant financial consequences.
This question is subject of the ruling discussed in this blog.
Court ruling
On July 24, the Central Board of Appeal (in Dutch: Centrale Raad van Beroep) issued a ruling on the question which bonuses and commissions should be included in the calculation of the transitional allowance.
In this case, the employer requested compensation for the transitional payment of EUR 72,131.20. The employer had paid this amount to its employee due the close of business because of his retirement on 1 October 2021. Therefore, the employer was entitled to compensation for the transitional payment from the Dutch Labour Bureau (in Dutch: UWV).
The UWV had taken the position that the employer was eligible for compensation but that the statutory transitional payment should have amounted to only EUR 55,868.64 gross. According to the UWV, commissions earned in the third-quarter of 2021 could not be counted because they were not payable in the reference period. Instead, the UWV claimed that the third-quarter commission from 2020 should be used for the calculation of the transitional payment.
This dispute centred around how to interpretate Article 2, paragraph 3, of the Decree on the concept of wages, notice period compensation, and transitional payment (in Dutch: Besluit loonbegrip vergoeding aanzegtermijn en transitievergoeding) and whether the decisive factor is when the commission or bonus was paid or when it was earned.
The Central Board of Appeal decided that the fairest interpretation is to include commissions and bonuses earned over the reference period, regardless of when they were actually paid. This approach ensures a closer connection between the transitional payment and the employee’s most recent salary level.
Key Points for HR
Bonuses and commissions must be included in the statutory transitional payment calculation if they are earned during the reference period, regardless of when they are paid.
This decision can lead to difficulties when calculating the transitional payment, as the reward and the amount of bonuses might not yet be clear at the time of the calculation and payment of the statutory transition payment.
