Many employers believe that a transition payment only has to be paid when dismissing an employee with a permanent contract. However, that is not the case. If you decide not to renew a fixed-term employment contract, the employee may also be entitled to a transition payment.

In this blog, we explain when you are required to pay a transition payment, how it is calculated, and which exceptions apply.

What is a transition payment?

A transition payment is a statutory compensation that an employer must pay to an employee when the employment contract ends at the employer's initiative. The purpose of this payment is to support the employee financially while transitioning to a new job.

Does this also apply to a fixed-term contract?

Yes. When a fixed-term employment contract expires and you decide not to renew it, the employee is generally entitled to a transition payment. This applies regardless of the length of the contract. Even if an employee has only worked for a few months, they start accruing entitlement to a transition payment from their very first working day.

When do you not have to pay a transition payment?

There are a few exceptions:

  • The employee resigns voluntarily.
  • If the employee decides to terminate the employment contract themselves, you generally do not have to pay a transition payment.
  • Dismissal due to serious misconduct: if the employee has engaged in seriously culpable conduct, they may lose their entitlement to a transition payment. Examples include fraud, theft, or other serious misconduct.
  • The employee reaches the state pension age. In many cases, no transition payment is due when the employment contract ends because the employee has reached the statutory retirement age.

How much is the transition payment?

Since 2020, the transition payment has been calculated as follows:

  • One-third of one month's gross salary for each full year of employment.
  • For part of a year, the payment is calculated proportionally.

This means that employees start accruing a transition payment from their very first working day.

Example

An employee earns €3,000 gross per month and has worked exactly one year. The transition payment is therefore:

€3,000 × 1/3 = €1,000 gross

If the employee has worked only six months, the transition payment will be approximately €500 gross.

Don't forget the notice obligation

Does a fixed-term contract of six months or longer expire? If so, you must inform the employee in writing at least one month before the end date whether or not you intend to renew the contract. This is known as the statutory notice obligation.

If you fail to do so, the employee may be entitled to an additional compensation on top of the transition payment.

Can you recover the transition payment?

In certain situations, employers can apply for compensation from the UWV. This mainly applies when an employee has been on long-term sick leave. In general, no such compensation is available when you choose not to renew a regular fixed-term employment contract.

What does this mean for you as an entrepreneur?

Do you employ staff on fixed-term contracts? If so, remember that the end of a contract is often not the last employment-related expense. In addition to the employee's final salary, holiday pay, and any outstanding vacation days, you will usually also have to pay a transition payment.

By taking this into account in advance, you can avoid unexpected costs and budget your personnel expenses more accurately.

Not sure whether you have to pay a transition payment or how much it will be? Luca Book provides payroll administration services for many entrepreneurs and can help you with questions about transition payments and other payroll-related obligations. If you are unsure, please contact us in time so you know exactly where you stand before the employment contract ends.