What is a transition compensation and how is it calculated?

Transition compensation, also known as transition payment or severance pay, is a compensation that employees can receive at the end of their employment contract. In this article, we will discuss when an employee is entitled to transition compensation and how to calculate the transition compensation.

When is an employee entitled to transition compensation?

If the employer takes the initiative to dismiss the employee (or does not renew the contract) then the employee is entitled to transition compensation. You can think of the transition compensation as compensation for being fired and, in addition, to make the transition to another job easier.

When is an employee not entitled to transition compensation?

There are also situations where an employee is not entitled to a transition compensation (or the compensation is reduced):

• If the employment contract is terminated with the consent of both parties (but parties can still agree a voluntary severance payment);
• If the employee is summarily dismissed;
• if the employee is younger than 18 and has not worked more than 12 hours per week on average;
• if the employee has reached the state pension age;
• If the employer’s business is bankrupt;
• if there is another provision in the collective bargaining agreement that replaces the transition compensation.

When the employee resigns himself, the employee is only entitled to the compensation when the employer showed serious culpable behavior or was negligent.

How high is the transition compensation if the employee is fired?

The amount of the transition compensation paid by the employer upon dismissal is determined based on 2 components: the monthly salary and the duration of employment. As of January 1, 2023, the compensation is a maximum of € 89,000 gross. Or, if the annual salary exceeds € 89,000, a maximum of 1 gross annual salary.

Compensation calculation

An employee is entitled to a transition fee from the first day of the employment contract in case of dismissal. So also if he is dismissed during the probationary period. The calculation of the transition compensation goes as follows:

• The employee receives 1/3 monthly salary per whole year of service from the first day of employment;
• The transition compensation over the remaining part of the employment contract is calculated according to the formula: (gross salary received over remaining part of employment contract / gross monthly salary) x (1/3 gross monthly salary /12 )

This formula is also used to calculate the transition compensation if the labor contract lasted less than one year.

Example 1: the employment contract lasted 9 years and 5 days. The gross monthly salary was €3,000. The gross hourly wage was €20. The employee worked 8 hours per day.

First, the compensation is calculated over the number of full years worked: 9 years x (1/3 of €3,000) = €9,000.
Then the compensation is calculated over the last 5 days. The total salary for the last 5 days is: 5 x 8 (hours worked) x € 20 (gross hourly wage) = € 800.
The calculation according to the formula is: the gross salary received over remaining part of employment contract divided by full monthly salary, times 1/3 gross monthly salary divided by 12 (months). In other words, (800/3000) x (1000/12) = 22.22
Total transitional compensation is € 9,000 + € 22.22 = € 9,022.22

Example 2: The employee is fired during his probationary period. The employment contract lasted a total of 5 days. The gross salary over these 5 days is € 800, which is considered the salary per month. The calculation is then as follows:

(€ 800 / € 800) x (1/3 x € 800)/12) = 1 x (€ 266.67/12) = € 22.22. The employee thus receives € 22.22 transition compensation for the 5 days he was employed.

Maximum transitional compensation 2023

The maximum transition compensation in 2023 is € 89,000. The maximum amount is adjusted annually according to the development of contract wages.

Replacement provision for transition compensation in collective bargaining agreement

A collective bargaining agreement may stipulate that a dismissed employee receives a substitute provision instead of transition compensation. As of Jan. 1, this will only be possible in cases of dismissal for economic reasons. Also, the substitute provision no longer needs to be equivalent to the statutory transitional compensation. However, the provision must consist of measures to prevent unemployment or limit its duration. Or a reasonable financial compensation. A combination of both is also possible.

Calculating the gross monthly salary

To calculate the transition compensation, the gross monthly salary must be determined. This is done as follows:

• Basic gross monthly salary with fixed working hours. This is the gross hourly salary multiplied by the working hours per month. This applies to employment contracts with a fixed number of hours.
• Basic gross monthly salary with on-call contract. The gross hourly wage is multiplied by the average working hours per month.
• Basic gross monthly salary in case of piecework or commission. Then the average that the employee received of this per month in the 12 months before the employment contract ended. Holiday allowance and fixed year-end bonus must be added to this.

Adding other wage components

To the basic gross monthly salary are added any other salary and the vacation allowance. If there is a fixed year-end bonus, 1/12 part of it is added to the basic gross monthly salary. If applicable, the following forms of salary are included in the calculation:

• shift bonuses;
• overtime pay;
• bonuses;
• profit allowances;
• variable year-end bonuses.

Sickness and calculation of transition compensation

Was the employee sick before he was dismissed or at the time of his dismissal? Then this has no consequences for the working hours. Nor does it affect the amount of the basic gross monthly salary.

When calculating the transition compensation, the gross salary is the starting point. This is the gross wage you agreed to in the contract. The salary may have been lower due to illness or leave, for example. This does not affect the gross wage applicable to the employee.

Is the wage lower due to illness or leave? Then the compensation is calculated based on the wage that the employee would have earned if he had not been sick or on leave.

Deduction of costs for training or outplacement

Costs of, for example, outplacement or training can be deducted from the transition compensation. This also applies to costs incurred by the employer because a longer notice period is used and the employee is exempt from work during this period. These costs must have been incurred in view of the dismissal and in consultation with the employee.

Did the employer incur costs during the employment contract to promote the employee’s employability within or outside the organization? Then these costs may also be deducted in consultation with the employee.

Only employability costs that are aimed at another position with another employer, or another position with the employer’s own company, can be deducted from the transition compensation.

Costs incurred by the employer to improve performance in one’s own position may not be deducted from the transition compensation. Are the costs incurred by the employer related to reintegration obligations or re-employment, then it is also not allowed to deduct these from the transition compensation.

The following conditions apply for the deduction of costs from the transition compensation:

• The employer has specified the costs and informed the employee about them.
• The employee agrees in writing in advance to deduct the costs from the transition compensation.
• The costs have been incurred by the employer itself.
• The costs have been incurred for the benefit of the employee.
• Payroll costs may not be deducted. This is different if employee and employer agree on a longer notice period and the employee is excused from work during this period.
• The expenses are in reasonable proportion to the purpose for which they were incurred.
• The costs are deducted from that part of the severance pay accrued during the period in which the costs were incurred or hereafter.
• The costs cannot be claimed elsewhere by the employer.
• The costs cannot be recovered from the employee through, for example, a study expense clause.

Transition compensation in instalments

Can the employer not pay the transitional compensation in 1 time, because it harms the business? Then the employer can pay the compensation in installments, spread over a maximum of 6 months. The employer will then owe statutory interest from 1 month after the end of the contract. The interest is calculated on that part of the transitional compensation that has not yet been paid.