Business-related reasons are one of the most common reasons for an organization to proceed with layoffs. These are reasons that affect the organization and/or a company’s finances. Examples include a reorganization, a restructuring, poor financial conditions, or a decline in work. Under the law, these types of circumstances qualify as grounds for termination. But what conditions must be met? And what rules apply? In this blog, we explain when termination for business reasons is possible and what an employer must take into account.
When is termination for business reasons permitted?
An employer has a certain degree of freedom to determine the structure of the organization. Restructuring the organization is part of this freedom. If this results in positions being eliminated or modified, and if that leads to layoffs, the employer must be able to explain why this decision is necessary and what circumstances led to it. The UWV then reviews this justification and applies a high standard in doing so.
Who is eligible for termination?
The employer may not simply decide on its own which employees may or may not remain, but must apply the so-called “proportionality principle.” This principle establishes an order in which employees are eligible for termination. Employees in the position(s) or department(s) affected by layoffs are thereby divided into age categories. Within these age categories, the employee with the shortest length of service is the first to be considered for layoff. Employees with temporary contracts are the first to be considered for termination. Employees subject to a prohibition on termination are protected from being laid off.
The principle of proportional representation does not mean that the employer has absolutely no discretion in determining which employees will or will not remain. By carefully considering the structure of existing positions or departments, the employer can still exert some influence in this regard.
Incorrect application of the proportionality principle may result in a request for termination being denied.
Relocation should be investigated
As is the case with virtually every ground for termination, in the event of termination for business reasons, it must first be determined whether an employee can be reassigned to another position. Which open positions or vacancies are suitable for this purpose depends on the employee’s knowledge, skills, and experience. This assessment must be conducted across the entire corporate group. If there is a suitable position for the employee within the group, the employer must reassign the employee to that position. The employee must also accept this reassignment.
Only when reassignment is not possible or not reasonable can dismissal for business reasons be further considered.
The UWV Procedure
To terminate an employee due to business-related circumstances, the employer needs a permit. This permit is requested from the UWV, which will review the termination, including the justification, the principle of proportionality, and the possibility of reassignment. If the permit is granted, the employer may terminate the employment contract with the employee. The employer must then observe the notice period and pay a transition allowance. The time taken for the UWV procedure may be deducted from the notice period, provided at least one month remains.
If the permit is not granted, the employment contract cannot be terminated. The employer will then have to file an appeal with the court to have the application reviewed again.
Termination with a Settlement Agreement
Fortunately, an UWV proceeding is usually not necessary. Instead, the employer can enter into a settlement agreement (VSO) with the employee to terminate the employment contract. For this to happen, however, the employee must agree to the settlement agreement. The employer will therefore need to convince the employee that it is better for the employee to agree to the settlement agreement than to wait for the proceedings to run their course. In that case, both parties save on financial and legal costs and avoid the uncertainty of a UWV proceeding.
When drafting the VSO, it is important to take into account the implications for, for example, unemployment benefits and financial arrangements.
Social Plan
If a large number of employees are at risk of being laid off, a social plan is often drawn up. This is a document that outlines various agreements regarding what an employee who is laid off will receive. This may include severance pay, assistance in finding new employment, training, or other benefits. A social plan ensures a consistent approach for all employees.
A social plan is usually the result of negotiations with the works council or with the union(s), but it can also be drawn up on the organization’s own initiative.
The role of the works council
If the organization has a works council, the process will begin with a request for advice. The advisory process is separate from the individual layoff procedure with the UWV. Through this process, the works council is involved at an early stage in redundancies for business reasons and can still influence the organization’s final decision. The works council’s influence typically consists of negotiating a fair social plan.
What are the costs and risks involved?
There are many pitfalls involved in a business-related termination process. For example, there are rules set forth by both the law and the UWV, and failure to comply with them can lead to higher costs, delays, or even a failed termination. To avoid these pitfalls as much as possible and to make the most of the flexibility an organization has, it is important to seek legal advice as early as possible.
Our employment law attorneys advise employers and employees on layoffs for business reasons and reorganizations. We are happy to help you identify the options, risks, and next steps, and to work with you to develop a strategy.
