Friday, September 23, 2011

Netherlands: Pension Reform Plans and Dismissal of Older Employees

By Denis Veldhuizen, Huyzer Doornik Der Kinderen

Pension reform plans

The Dutch pension system may be characterised in terms of three pillars, namely:

• a basic state old-age pension under the General Old Age Pensions Act (AOW),

• supplementary pension schemes by virtue of the employer, and
• private savings for retirement.

The AOW provides for basic state pensions for people who have reached the age of 65 and over, which is as the same time as the start date of the second pillar corporate pension schemes.

It goes without saying that due to the economic crisis pension costs are increasing continuously and pension plans have become less resistant against financial shocks. In June 2010, the Dutch employers’ federations and the trade union federations (Federatie FNV, CNV and De Unite), both forming the Labor Foundation (Stitching van de Rabid), set out the adjustments they deem necessary for pension schemes in the so called Pension Accord ('pensioenakkoord'). Union and corporate support for the pension reform plans is seen as essential to ensure it can become law without too much outside protest.

The most important agreements in the Pension Accord regarding the corporate pensions were:

(i) a future-proof system that can better withstand changes in life expectancy and developments on the financial markets, but which also has an improved indexation quality;
(ii) more extensive automatic cost increases (for both employees and employers) must be avoided;
(iii) pension contracts must be made resistant to shocks from the financial markets (interest, inflation, returns);
(iv) pension contracts must be as complete and transparent as possible.

It was also agreed to raise the AOW-age. The first raise from 65 to 66 will enter into effect in 2020 and shall be raised to 67 by 2025, depending on life expectancy projections. Flexibility can involve penalties or rewards; the pension of those opting for early retirement is offset by a 6.5% reduction per year, while that of those who work after reaching the retirement age is offset by a 6.5% increase per year. Additionally, the AOW level will be increased by a 0.6% inflation rate.

The Pension Accord also includes proposals to increase the labour market participation of older employees through incentives that make it attractive for both employers and employees to continue their working relationship.

In the meantime the Minster of Social Affairs and Employability Mr. Kamp lodged a draft bill to parliament to raise the retirement age to 66 in 2020 and 67 in 2025. Additionally, the Minister has announced measures to increase the flexibility of dismissal laws with respect to employees at the age of 65 years or older, to introduce a softer regime with respect to salary payment during an older employee’s sickness (which is currently 104 weeks), and the possibility for an employer to enter into more than three definite term employment contracts in a row with older employees without the risk of this being held to be an indefinite term employment contract.

The Pension Accord looked like a done deal but all of a sudden the largest union within the Federatie FNV, named FNV Bondgenoten, voted against it. This resulted in an internal crisis in the Federatie FNV. Social affairs minister Henk Kamp made a passionate plea to parliament last Thursday to vote through the pension deal and Last Friday the minister made some extra concessions to help people on low incomes who will be hit hardest by financial penalties if they still want to retire at the age of 65. Last Monday the Federatie FNV gave its green light to the reform plans.

Dismissal of employees at the age of 65 and older

The main question is how to deal with the dismissal regime of employees at the age of 65 and older from a legal perspective. Under Dutch law an employment contract for an indefinite period can be terminated in the following ways:

a. by giving notice after receipt of a dismissal permit from the labour authorities (called UWV Werkbedrijf);
b. by mutual consent;
c. with immediate effect in case of an urgent cause;
d. termination for serious cause through the sub district court.

Dutch law does not provide for the possibility to deviate from the above. However, most Dutch employment contracts and/or (industry wide) collective labour agreements stipulate that the employment contract terminates by operation of law when the pensionable age of 65 is reached, thus without the need to give notice. Such provision is called a "pension-triggered termination clause".

The main question is whether this provision violates the prohibition against age discrimination in employment. The Dutch Equal Employment Opportunities (Age Discrimination) Act (Wet gelijke behandeling op grond van leeftijd bij de arbeid, the "Equal Employment Opportunities Act") (based on the EU Directive 2000/78) in effect since 2004, prohibits discrimination on the grounds of age. However, a distinction based on age is objectively justified (and therefore not prohibited) if it involves the termination of an employment contract based upon the employee reaching the pensionable age under the AOW.

One could even take the position that the justification to send 65 old Dutch employees home is accepted by the European Court of Justice (ECJ) in the Age Concern case of July 2006. The ECJ held that derogation from the principle of age discrimination was permitted under the Directive if it furthered “legitimate social policy objectives, such as those related to employment policy, the labour market or vocational training”. Such objectives were, by “their public interest nature... distinguishable from purely individual reasons particular to the employer’s situation, such as cost reduction or improving competitiveness”.

It needs to be stressed that a dismissal on the basis of age is only specifically allowed by Dutch public law when the employee turns 65. If the age-based dismissal affects a 62 or 63 year old employee this has to be based on an objective justification and thus comply with the requirements of legitimacy, efficiency and proportionality. The objective justification is being applied very strictly and there are very few examples in which an earlier pension-age is allowed. For example, circulation of personnel and decrease of motivation when getting older do not count as objective justification.

From a civil law perspective it is still not 100% clear whether the pension-triggered termination clause in an indefinite term employment contract will stand in court. A few years ago the Amsterdam sub district Court had to rule on this issue and held that an employment contract must be either for a definite period – in which case it terminates by operation of law at the end of the period – or for an indefinite period – in which case it by definition does not terminate by operation of law. According to the court, this standpoint is incompatible with the view that an employment contract for an indefinite period can terminate automatically pursuant to a pension-triggered termination clause agreed in an individual employment contract or collective labor agreement.

However, this judgment has not been followed by other courts. Several sub district courts held that an employment contract for an indefinite period can end by operation of law pursuant to a pension-triggered termination clause in an individual employment contract or collective labor agreement with. They used the argument that the employee would fall back on the AOW at the age of 65.

Problems for the employer cannot be ruled out if the employment contract does not provide for a pension triggered termination clause. In 2009 the Delft sub district court ruled in a case initiated by a dismissed 65 year old employee whose employment contract did not provide for a pension triggered termination clause. Nor was the employment contract subject to a collective labor agreement. The employer argued that the employment contract terminated automatically based solely on the fact that employee had reached the pensionable age. The court concluded that the fact that the employee was entitled to a pension upon reaching the age of 65 did not mean that his employment contract terminated automatically at that age. This conclusion does not follow from a specific statutory provision. The sub district court also held that even if in the past it had been customary for employment contracts to terminate automatically when the employee reached the pensionable age, this was no longer true. The court's conclusion was based in part on the fact that at the time there were already discussions regarding the increase of the pensionable age under the AOW to 67 years.

In light of the above employers are well advised to check whether its employees have in the past signed an employment contract containing a pension-triggered termination clause and the employer should – when the employee is approaching the pensionable age – check whether he/she still intends to stop working at 65. If this is still the employee’s intention it is advisable to document that in a timely manner. If the employee indicates that he does not plan to stop working at the age of 65, the employer can, no later than on the employee's 65th birthday, request a dismissal permit with Dutch labour authorities to make sure that the employment contract ends anyhow. Alternatively the employer could request the sub district court to rescind the employment contract.

In the current situation, an extra advantage of having a dismissal permit or a court resolution in place is that if the employer and employee decide to continue the employment relationship beyond the employee's 65th birthday, a new employment contract for a definite period can be concluded that will terminate by operation of law after the agreed period.

Further governmental measures

With the above mentioned announcement of Minister Kamp to increase the flexibility of dismissal laws for AOW-entitled employees to keep them on the labour market, it is expected that pension triggered clauses will be incorporated in the Dutch Civil Code and that contracts containing a pension trigged clause will automatically end at the AOW age.

Minister Kamp has also announced easier ways for the employer and the AOW-aged employee to continue their relationship for a definite period of time or a certain project after the AOW age without the need to have a dismissal permit or court resolution. In addition thereto the Minister Kamp is considering introducing a bonus system for employers who facilitate employees continuing to work after the age of 65.

On top of that the Minister has announced measures to decrease the cost for the employer who deals with a sick employee at the age of 65 or above. Currently, under the Dutch Civil Code, employers must continue to pay the salaries of sick employees - at least 70% of salary - for the first two years of sick leave. Most employers top up wage payments from 70% (legally required) to 100% on the basis of collective agreements; so a supplement of 30% is customary in the first 52 weeks. A costly thing.

Furthermore it is expected that employers employing employees at the age of 65 and above shall no longer be obliged to pay the minimum wage rates stipulated in the Minimum Wage and Minimum Holiday Allowance Act (wet minimumloon en minimumvakantiebijslag). Currently the minimum monthly salary of 23 years and older employees is around EUR 1,500 gross.

The text of the proposed law is currently prepared and will be submitted to the Dutch parliament early 2012.

Evidently, in the near future Dutch employees shall have to work longer against almost the same old age pension income but this was about time…..