The Hague

Bonuses in severance pay

Are you an employee whose contract is being terminated and are you offered transitional severance pay? Then you might wonder how the amount of severance pay is calculated. An issue that has recently been brought into question is whether or not bonuses are included when calculating transitional severance pay.

Bonuses included in calculation?

Everybody used to think that bonuses are included in the calculation of transitional severance pay. However, recent ruling in both the district court and courts of appeal has not supported this point of view. So, how is the transitional severance pay calculated?

The amount of transitional severance pay is outlined in Dutch employment law. The Decree on Incomes outlines severance pay, as well as other employment issues, including notice periods. The Decree on Incomes, however, extrapolates further on issues including salary components and working time. It also provides a summary of all salary components.

Salary components

Per this ruling, salary components include:

  1. The basic monthly wage
  2. The holiday supplement
  3. Any agreed fixed salary components from the previous 12 months. These may include overtime or shift pay
  4. Any agreed variable salary components from the previous 36 months. These may include bonuses, distribution of profits or end-of-year payments

Bonuses fall into the fourth category, the “agreed variable salary components”. These are only counted as part of a severance allowance if they have been agreed upon. They must also be dependent on the employee’s performance, the company’s results or a combination of the two.

For example, this means that a discretionary bonus does not count for the purposes of transitional severance pay. If an employee is simply given a bonus every year, this bonus is not subject to an agreement. It is not dependent on the employee’s performance or the company’s results. The employer decides unilaterally whether to award the bonus and at what level.

Contact

If you have further questions regarding a severance package or any other employment issues, please contact one of our specialised lawyers.

Update article: December 2017