Council of State critical of restriction on compensation scheme transition allowance

Introduction
In June this year (2025), the government asked the Council of State for advice on the bill ‘Limitation of the compensation scheme for transition allowance in case of dismissal due to long-term disability to small employers’ (hereinafter: the bill). On this, see our earlier article.

Summary bill
When an employment contract is terminated due to long-term disability, the employee is entitled to the statutory transition allowance. From 1 April 2020, employers can receive compensation for this transition allowance from the UWV (up to the amount calculated at the time the 104-week period has expired). The bill aims to limit this compensation to only small employers. The definition of ‘small employer’ is aligned with the financing system of the Dutch social security: it concerns an employer with a wage bill up to and including 25 times the average contributory wage per employee per calendar year (based on wage data from two years earlier). Large employers would no longer be entitled to this compensation. This measure should lead to structural savings of around €380 million.

Council of State’s advice
The Council of State is critical of this bill and advises not submitting the bill to the House of Representatives unless it will be amended.

Reconsideration of abolishing transition allowance for long-term disabled employees
The Council of State’s primary objection is that the bill is mainly budget-driven and lacks a fundamental balancing of interests between the vulnerable position of the long-term disabled employee on the one hand and the already heavy obligations of employers in case of illness on the other.

After all, as a result of the bill, in about 80% of cases the costs of the transition allowance will again be borne by the employer. This while the employer already has to continue paying wages for two years in case of long-term incapacity for work and promote the reintegration of the sick employee. These objections for employers were the reason for introducing the compensation scheme at the time. With its abolition, these objections come into play again.

In this balancing of interests, it should be taken into account that the transition allowance in case of long-term illness often only has the character of a “bonus”, because the employer already continues to pay wages for two years and makes reintegration efforts and employees (afterwards) often fall back on disability benefits (WIA) and a transition to a new job is often not or limited the case. In addition, the bill increases the risk of making permanent contracts more expensive and unattractive for employers, which may actually increase flexibilisation.

Against this background, the Council of State advises the complete abolition of the mandatory transition allowance in the event of dismissal due to long-term disability for work. This could provide a solution to the higher employer costs in case of long-term illness and give an incentive to employers to offer permanent employment contracts again. It would also make the compensation scheme redundant, thus reducing the multiplicity and complexity of regulations.

Other objections
The Council of State also cites other objections to the bill:

1. Risk of return of dormant employment contracts: employers no longer eligible for compensation may choose to maintain ‘dormant employment contracts’ again. The compensation scheme actually ended the practice of dormant employment contracts. After all, case law has ruled that the compensation scheme implies that employers must agree, on the basis of the principle of good employership, to an employee’s proposal to terminate a ‘dormant employment contract’ while granting the transitional allowance (so-called Xella standard). If the compensation option now disappears again (for the most part), this issue will resurface and lead to new discussions and lawsuits.
2. Conflict sensitivity: the compensation scheme will become conflict-sensitive as a result of this bill: qualifying as a small or medium-sized employer means a difference between being entitled to compensation or not. As a result, there is expected to be an increase in objection procedures against the Tax Administration’s qualification, especially if employers are in the borderland in terms of size (between small and medium-sized).

Whether the bill (in its current form) will actually be pushed through is therefore still uncertain, given the advice of the Council of State. What is certain, however, is that the discussion on the transition allowance in case of long-term disability for work is not over for the time being.

Do you have any questions about dismissal in case of long-term disability, the transition allowance or avoiding other legal pitfalls in that respect? Feel free to contact our employment law team. We will be happy to think with you about the best approach in your situation.