Government to deduct dismissal compensation from unemployment benefits

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In early September 2004, the Dutch Minister of Social Affairs and Employment announced that, from 2005, compensation awarded to dismissed employees would subsequently be deducted from their unemployment benefits. Following a wave of sharp criticism from trade unions, employers, the opposition and even some parties in the ruling coalition parties, the government decided to tone down the proposals somewhat.

In order to economise on unemployment benefits, longer-term 'subsequent' benefits have been scrapped in recent years and a proposal has been tabled to do away with 'short-term benefits' as well - the requirement for entitlement to unemployment benefits will in future be that a worker must have worked for 39 of the last 52 weeks. The threshold is currently 26 weeks. On 3 Setpember 2004, the Minister of Social Affairs and Employment, Aart Jan de Geus, proposed a third change, related to 'non-cumulative dismissal compensation'. This proposal involves deducting any dismissal compensation awarded to employees on termination of their employment contract from any unemployment benefits. In so doing, the Minister hopes to save EUR 75 million in 2005 and as much as EUR 150 million in the years thereafter. The aim is to make benefits under the Unemployment Insurance Act (Werkloosheidwet, WW) less attractive as an early retirement or redundancy scheme for older employees and to stimulate unemployed people to look for another job sooner. Given that measures taken by the government now rule out dismissal through the Occupational Disability Insurance Act (Wet op de Arbeidsongeschiktheidsverzekering, WAO), or early retirement (NL0410101N), the minister is afraid that older employees will now seek recourse to unemployment benefits following dismissal. Unemployed individuals with dismissal compensation are thought to be less motivated to search for alternative employment, instead waiting until their dismissal compensation has been depleted. This applies especially to employees who receive a non-statutory supplement to their unemployment benefits. Taking on a new job then means losing this non-statutory supplement.

Aim of the proposal

Along with many other cost-cutting measures, the latest government proposal is based on the christian democrat/liberal coalition government's July 2004 'growth memorandum' (groeinota) entitled 'Opting for growth' (Kiezen voor Groei) (NL0408104F). This emphasises the importance of making it possible for people to find paid employment and re-enter the labour process as quickly as possible should they become unemployed; a flexible labour market is said to present more opportunities for people who are (temporarily) inactive. To this end, the labour market must become more flexible and dynamic, and the period of recourse to social security arrangements limited. Employees must be assigned greater responsibility for risks. To achieve this, financial incentives must be introduced, and introducing non-cumulative dismissal compensation falls within this scope.

Consequences for the courts

Under the government's proposal, the unemployment benefit of all employees who are awarded dismissal compensation (NL0311103T) would immediately fall to a level of 70% of their last-earned daily pay, which is also already subject to a specified ceiling. In some cases, unemployed people would not be eligible for unemployment benefits at all. Compensation awarded to dismissed employees for the purposes of training or career counselling will not be deducted from unemployment benefits, as such initiatives are intended to ease the transition to alternative employment.

The proposal will have serious consequences for the Dutch dismissals system (NL0308104F). In practice, the employer and employee often reach mutual agreement on termination of the employment contract. The employee agrees because in many cases sizeable dismissal compensation is negotiated, designed in part to compensate for the expected loss of income. In determining the level of compensation, the employee’s age is taken into account, along with the number of years of service and their position in the labour market. Employer and employee then put the termination before the courts only to ensure that the employee will be eligible for unemployment benefits on dismissal. In other words, the legal steps serve as a 'pro forma' procedure. If dismissal compensation is now deducted from unemployment benefits, the employee will be far less willing to cooperate with the dismissal and more inclined to submit an objection to the relevant subdistrict court. This means that substantive testing on the part of the subdistrict court will increase to greater levels than before with respect to dismissal procedures. This, in turn, will significantly weigh down the courts. There will also be greater use of the other main way of dismissing employees in the Netherlands - termination with approval from a Centre for Work and Income (Centrum voor Werk en Inkomen, CWI) (NL0012116F). This procedure offers the employer less chance of succeeding because it is very strict and, in many cases, unduly lengthy.

Consequences for redundancy plans and older employees

The government's proposal will also have major consequences for redundancy plans. During reorganisations or staff cutbacks, the unions try to soften the blow by negotiating some form of compensation in redundancy plans. This will no longer be possible or at least far less worthwhile. The trade union movement will now demand that employers make more of an effort to find alternative employment for those affected.

The plan, according to critics, stands to encumber older employees more. Based on their many years of service, they generally receive greater dismissal compensation. Finding it harder to secure alternative employment, they are highly dependent on unemployment benefits supplemented by their dismissal compensation. In comparison with younger employees, under the new arrangements they will only be eligible for unemployment benefits at a much later stage, since their dismissal compensation is higher despite having paid much lower premiums. The price paid by older employees is also far greater because they have already had to contend with the abolition of 'subsequent' benefits and the raising the age limit under the Act on Income Provisions for Older or Partially Disabled, Formerly Unemployed Persons (Wet Inkomensvoorziening Oudere en gedeeltelijk Arbeidsongeschikte Werknemers, IOAW).

Dismissal compensation was also deducted from unemployment benefits before 1987. This policy was scrapped at the time because it proved ineffective. Various means by which to circumvent the scheme emerged on a large scale. Shortly before dismissal, employers awarded the employee a bonus or raised the salary to ensure higher benefit levels. Or the dismissal would be postponed for six months to provide the employee with enough time to look for another job in the interim. Despite these negative experiences, the Minister now intends to reintroduce the same measure.

Trade unions’ response

The social partners are vehemently opposed to the minister’s proposal. The Dutch Trade Union Federation (Federatie Nederlandse Vakbeweging, FNV) sees the measure as the end of redundancy plans. Astrid Jongerius of FNV states that this will take away one of the trade union movement’s 'bargaining chips' because demanding dismissal compensation often prompts employers to keep their staff on after all. According to Doekle Terpstra of the Christian Trade Union Federation (Christelijk Nationaal Vakverbond, CNV), the change would remove all flexibility from the labour market. The Federation of Managerial and Professional Staff Unions (Federatie voor Middelbaar en Hoger Personeel, MHP) fears that middle-ranking staff categories will be the most hard hit by the proposal. Employees will, for example, no longer be able to maintain their mortgage payments after having fallen back to benefit at a level of 70% of their last-earned salary. Furthermore, part of current dismissal compensation is also intended to make it possible for these categories of staff to continue building up their pensions.

Employer organisations’ response

Even the employers' organisations, including the Dutch Federation of Small and Medium-Sized Enterprises (Midden- en Kleinbedrijf, MKB) and the Confederation of Netherlands Industries and Employers (Vereniging van Nederlandse Ondernemingen - Nederlands Christelijk Werkgeversverbond, VNO-NCW), oppose the government’s plans. They are especially concerned that employees will display fierce resistance against being dismissed and that this will make it extremely difficult for employers to dismiss unwanted staff members. VNO-NCW also attaches great importance to retaining the option of awarding employees reasonable compensation in cases of reorganisation. The General Employers’ Association (Algemene Wergeversvereniging Nederland, AWVN) fears that the Netherlands will 'grind to a halt' as a result.

Politicians’ response

Along with the trade union movement, many politicians are highly sceptical too. Predictably, the opposition is against the proposal to curtail dismissal compensation, but there are even parties within the coalition that are opposed to the plans. On 22 September 2004, the Christian Democratic Appeal (Christen Democratisch Appèl, CDA) coalition party expressed its rejection of the plan to cut back on dismissal compensation. According to CDA, scrapping dismissal compensation goes against the social security component of the Unemployment Insurance Act and will lead to significant income erosion for the middle-income bracket. One of the liberal parties in the coalition, Democraten 66 (D66), is also negative about the proposal.

Amended proposal

At the end of September 2004, the government decided to reverse EUR 1 billion of its planned cutbacks, including changes to the plans on the deduction of dismissal compensation from unemployment benefits. While the proposal will not be reversed completely, unemployed people may now keep the equivalent of one year’s net pay as dismissal compensation without any resulting cut in benefits.

Despite the government having apparently made concessions to the trade union movement to a certain extent, there is still avid opposition. According to the FNV chair, Lodewijk de Waal, there has been some movement but not enough: 'the cabinet has smashed 20 windows and now proposes repairing one door.' Consequently, the three trade union federations (FNV, CNV and MHP) called for nationwide industrial action on 2 October 2004. The turnout was considered impressive: 300,000 people converged on Amsterdam to protest against the government’s policy. However, despite this massive display of protest, the Lower House of parliament approved the government’s proposed cutbacks during a general debate and has thus agreed to the arrangement under which unemployed people may retain one year’s net pay in compensation.

Commentary

In the end, the government reversed the measure - at least in part. This is probably mainly because of protests stemming from the D66 and CDA coalition parties. The government emphasises that its plans have not been amended because employer and employee organisations object to them. It is also highly likely that the proposal to do away with dismissal compensation completely was tabled specifically to be withdrawn at a later stage. This enabled the government to make concessions vis-à-vis its opponents and, in so doing, maintain other proposals.

Despite the new scheme being softened somewhat by the amendment, it could still be particularly unpleasant for older employees. They often receive a higher level of compensation because of their many years of service, and because each year above the age of 40 counts for 1.5 units and above 50 for two in calculating compensation. Those employees who are most dependent on their dismissal compensation as a supplement to the provisions of the Unemployment Insurance Act because they have more difficulty finding alternative employment will therefore be affected the most. (Ilse Zaal, HSI)