How much does it cost to fire an employee?
- Eshter Riphagen
- 9 Jul 2020
- Edited 19 Jan 2023
- 4 min
- Managing and growing
Firing an employee comes at a price. And the true cost may be higher than you think. Making arrangements with your employee may be a better option. It may sting for now, but is probably better in the long run. How much does it cost to fire staff? Here is a list of all the costs you will run into when you let an employee go. As well as tips to save costs.
Are you allowed to dismiss your employee?
Companies cannot fire employees simply because they want to. You need a valid reason to let go of an employee. For example, refusal to work, misconduct, unsatisfactory performance, a reorganisation or (partial) company closure. Make sure to check your rights and obligations first. Expiry periods (in Dutch) apply, so do not wait too long before submitting the request.
Choose a dismissal procedure
There are four distinct dismissal procedures, each with their own conditions and options.
- Immediate dismissal (ontslag op staande voet, in Dutch). This is a quick dismissal procedure but it is only allowed in special cases: theft, fraud, drunkenness, lying, and more.
- Petitioning the district court (kantonrechter. This procedure is an option in case of poor performance, labour disputes or a combination of circumstances.
- Requesting a dismissal permit from the Employee Insurance Agency (Uitvoeringsinstituut Werknemersverzekeringen, UWV). For business reasons, reorganisation, bankruptcy, disability, and mass layoffs (more than 20 employees).
- By mutual agreement. You enter into a settlement agreement together.
Whatever procedure you pick, laying off staff always comes at a price. Here is a list of the main cost items.
1. Notice period: 1 to 4 months' salary
You have to give your employee a notice period. During that time you have to keep paying their salary. The longer they have worked for you, the longer the statutory notice period. Most notice periods are between 1 and 4 months. Employees who have been with you for years may be entitled to more. Employees with a temporary contract are not entitled to a notice period unless you agreed on one.
Contracts are usually terminated at the end of the month, as per the provisions of the contract itself or the collective labour agreement (CAO). You have to keep paying your employee until the end of the month.
2. Duration of the procedure: several months
Firing an employee is not something you do lightly. Making the right decision takes time. You might decide to give your employee one more chance. Or maybe you need some time to put together a dismissal file. And after you decide that dismissal is the only way, the dismissal procedure itself will also take time. The Employee Insurance Agency (UWV) usually takes 6 weeks to process a request. Court proceedings usually take 8 weeks. If your documents are not in order, the process may take months. Employees may sometimes look for ways to stall for time or change your mind. They can object your decision and then lodge an appeal. They stay employed until the procedure has been completed. Good to know: this time can be deducted from the notice period.
3. Final settlement: holiday pay and leave
When an employee leaves your company, you have to pay them everything they are still owed, such as:
- Holiday allowance. Holiday pay is accrued per month. When an employee leaves your company, you have to pay them the balance they have accrued.
- Holiday entitlement. Any leave days that an employee did not use have to be paid out. This pay-out is based on their gross daily pay including holiday allowance and end-of-year bonus but excluding extra allowances and pension contributions. Talk to your employee to see if they can take a few more days off.
- Performance bonus or end-of-year bonus (in Dutch). Contracts or CAOs often contain agreements on bonuses. Your employee may be entitled to part of their usual bonus.
- Payable expense claims, such as travel expenses.
- Payable overtime.
It is also possible that the employee has debts with you. For example:
- Training costs
- Loan from the boss
- Too many days of leave
You have to settle in full no later than 1 month after termination of employment. If you pay late, you will also have to pay interest (in Dutch).
4. Transition compensation: 1/3 monthly salary per year of service
If you choose to dismiss an employee through the UWV or district court, you have to pay a transition payment to compensate for dismissal. A transition payment consists of one-third of the employee’s monthly salary for each worked year up to €89,000. You must also pay this fee if you do not renew a temporary contract.
If you opt for dismissal by mutual agreement, you do not have to pay transition compensation. But smart employees will usually demand something similar.
You can use this calculation tool (in Dutch) to figure out how much transition payment is due. You can pay in instalments over a maximum of 6 months.
5. Procedural costs: court fees, lawyer, mediation
The dismissal procedure itself also costs money. You will have to put in time yourself or bring in advisers. A lawyer costs between €100 and €200 per hour. You can also agree on a fixed price. Alternatively, you can try to find a way out of the conflict (if applicable) through mediation. On top of that, your bookkeeper or accountant will have to spend time updating your payroll records.
And if you want the case to go to trial, you will have to pay a court fee (in Dutch) of €83 or €124 (for legal entities).
6. Hidden costs
Some costs are not as visible as those listed above. Dismissal procedures take time and money. Besides, they may cause unrest among your other employees, harming productivity. You may have to recruit new employees if the dismissed employee calls in sick.
Smart ways to cut costs
You cannot avoid all dismissal costs, but you can limit them by following a few smart tips.
- Make sure to keep accurate records. “To prosecute is to prove” is a well-known saying among lawyers. So, make sure to record everything on paper. When an employee is performing poorly, issue a written warning and give them the chance to make amends. If you petition a district court for dismissal, the judge will always require you to show an improvement plan. If you want to dismiss an employee for business-economic reasons, UWV will request all your figures. Make sure that your records are clear and complete from the very start.
- Bring in expert assistance. Contract a lawyer for the legal proceedings and a bookkeeper or accountant for the financial side of things. Only do it yourself if you are confident in your knowledge and experience.
- Go for the solution that will hurt least in the long term - even if it stings for now. Reaching an agreement with the employee is often cheaper than a full dismissal procedure. If your offer is reasonable and the employee clearly knows that the only other option is dismissal, they will usually agree. With this approach, the employee retains their right to unemployment benefits.
- Communication is key. Be open and direct. Explain your position and honour your word. This way, your other employees will always know what to expect.