Step-by-step plan for calculating severance pay in 2020

Since 2020, the transition payment is calculated using a fixed formula: your employee accrues entitlement from the first working day, and for each full year of service, you calculate 1/3 of a gross monthly salary; remaining months and days are counted pro rata. There is no longer a minimum period of service, and the employee's age plays no role. In 2026, the payment is legally capped at €102,000 gross, or at a maximum of one gross annual salary if that is higher. Below, you will walk through all the variables in a clear step-by-step plan so that you know what a dismissal costs your company and how you can limit those costs.

Calculating severance pay in brief

Do you want to get to the core quickly? These are the four steps you go through:

1. Determine service duration – from the first working day to the end date, accurate to the day.
2. Determine gross monthly salary – including holiday allowance and fixed salary components.
3. Apply formula – 1/3 gross monthly salary per full year of service, plus a pro-rata portion for the remaining period.
4. Deduct allowed expenses – provided this is recorded in writing in advance.

The rest of this article details each step, with a calculation example, the maximum, and answers to frequently asked questions.

What is the transition payment and when do you have to pay it?

The transition payment is the statutory severance pay that you, as an employer, are in principle required to pay when an employment contract ends at your initiative. Examples include termination with a dismissal permit from the UWV, dissolution by the subdistrict court, or the non-renewal of a temporary contract that expires at your initiative. The payment is intended as compensation for the dismissal and to facilitate the transition to other work.

Since 2020 (the introduction of the Balanced Labour Market Act, WAB), the regulations have changed on a number of points. The most important changes at a glance:

• Entitlement from the first working day. The former threshold of two years of service has been abolished. Entitlement to a transition payment may exist even with short-term employment.
• No more age factor. The employee's age is no longer taken into account in the calculation.
• A single accrual percentage. The higher accrual after ten years of service has disappeared. The same rate now applies to every year of service.

Step 1: determine the duration of employment

First, calculate how long the employee has been employed, counting from the first working day up to and including the end date of the contract. Unlike before, you no longer calculate in half-year increments, but accurate to the day: full years, remaining months, and remaining days all count.

Pay attention to these points when adding up service time:

• You add up consecutive contracts if the interruption between the contracts is no longer than six months
• Successive employment counts. If someone first worked through a temporary employment agency or at an acquired company and essentially performed the same work, that period generally counts as well.
• For employment contracts prior to 2015, different intervals or intervals regulated in a collective labour agreement may apply. If you are unsure about the exact calculation, have this checked.

Step 2: calculate the gross monthly salary

The calculation is based on the gross monthly salary, but this is broader than just the basic wage. You add fixed, agreed-upon wage components to it. As a rule, this includes:

• the holiday allowance (holiday pay);
• a fixed year-end bonus or thirteenth month;
• fixed, structural allowances such as a fixed shift allowance;
• Structural overtime of a permanent nature.

The situation is different for variable remuneration. If an employee earns based on piecework or commission, you use the average over (in principle) the twelve months preceding the end of employment, or pro rata in the case of shorter employment. Exactly which components count and how you value them is regulated by law; calculate carefully here, as an incorrect basis affects the entire calculation.

Step 3: Apply the formula

You can calculate the transition payment using the duration of employment and the gross monthly salary. The main rule since 2020 is simpler than the old formula:

• Per full year of service: 1/3 of the gross monthly salary.
• For the remaining months and days: a proportional (pro rata) part of that 1/3 monthly salary.

A simplified example makes it concrete. Suppose an employee has been employed for exactly 3 years and the gross monthly salary amounts to 3,000 euros (including holiday allowance). The transition payment is then approximately 3 x (1/3 x 3,000) = 3,000 euros gross.

If the employment does not end after a full year, you include the extra period pro rata. With the same salary of 3,000 euros and employment of 3 years and 4 months, the calculation looks approximately like this:

• 3 full years: 3 x (1/3 x 3,000) = 3,000 euros;
• 4 remaining months: (4/12) x (1/3 x 3,000) = approximately 333 euros;
• Total: approximately 3,333 euros gross.

This is an approximation to demonstrate the principle. For a result that is accurate down to the day, you can use the official government calculation tool or have the calculation checked by a lawyer.

Is there a maximum?

Yes. The transition payment is capped by law, and this maximum amount is indexed annually. In 2026, the statutory maximum is €102,000 gross. If the employee earns more than that amount per year, a maximum of one gross annual salary applies as the upper limit instead. Please note that this amount changes annually; always check the maximum applicable in the relevant year when making a calculation.

Step 4: Deduct allowed costs

Subject to conditions, you may deduct certain transition and employability costs from the reimbursement. Examples include costs for an outplacement program or training that increases the employee's chances on the labor market outside your organization. The key conditions are:

• the costs were incurred with a view to the employee's departure or broader employability, not to enable him to function better in his current or a subsequent position within your own organization;
• the employee has agreed in advance, specified and in writing, to the deduction of these costs;
• The costs have been incurred within a reasonable period before the end of the employment, unless otherwise agreed in writing.

The practical lesson is simple: always record these types of agreements in writing beforehand. If you fail to do so, you cannot deduct the costs afterwards and you effectively pay double. Offsetting the transition payment against compensation for damages may also be relevant under certain circumstances; read our article on offsetting the transition payment against compensation for damages.

Payment in installments and points to consider

In principle, you do not have to pay the transition payment in a lump sum: payment in installments is possible under certain conditions, although interest may be due. In special situations, such as long-term disability or business closure, separate arrangements and compensation options exist. Whether these apply to your situation depends heavily on the facts. If in doubt, have this assessed, as incorrect handling can later lead to a wage claim or legal proceedings.

Frequently asked questions about the transition payment

Is an employee with a short period of service also entitled to a transition payment?

In principle, yes. Since 2020, an employee accrues entitlement from the first working day. The old requirement of a minimum of two years of service has been abolished. With shorter service, the compensation is naturally proportionally lower.

Is a transition payment due in the event of termination by mutual agreement?

When leaving via a settlement agreement (dismissal by mutual consent), the transition payment is not automatically legally due, because the contract then ends by consent. In practice, however, the transition payment is often used as a starting point for negotiations regarding the severance pay. What is reasonable depends on the circumstances.

Does the holiday allowance count in the calculation?

Yes. The gross monthly salary you use as the basis is increased by fixed salary components such as holiday allowance and, where applicable, a fixed thirteenth month or fixed structural allowances.

What is the maximum transition payment?

The statutory maximum is indexed annually. In 2026, this is €102,000 gross, or a maximum of one gross annual salary if the employee earns more than that amount per year. Always check the amount applicable in the relevant calendar year.

Do I also have to pay the transition payment if the employee resigns themselves?

As a rule, no. The transition payment is due if the employment ends at the employer's initiative. If the employee resigns themselves, there is generally no entitlement, except in special situations such as seriously reprehensible conduct by the employer.

How do I calculate the transition payment for employment that does not amount to a full year?

You calculate full years of service at 1/3 of the gross monthly salary and add a proportional (pro rata) amount for the remaining months and days. For 3 years and 4 months, you therefore count the four extra months pro rata on top of the three full years. For an exact result down to the day, use the official calculation tool or have it checked.

Need help with redundancy or a calculation?

An incorrect calculation or a dismissal that is not handled carefully can cost you an unnecessary amount of money. Our legal experts recalculate the transition payment for you, draft a watertight settlement agreement , and guide you through the entire dismissal process. View what we do in the field of employment law or schedule an intake directly, and we will review your situation without obligation.