Dormant employment contracts: a double cost on the horizon?

Dormant employment contracts were already the subject of much attention due to the abolition of the compensation scheme at the UWV for large employers as of 1 July 2026. But now it seems there is yet another financial risk on the horizon: employers may soon also have to pay out holiday pay for this ‘dormant’ period.

Dormant employment contracts and the compensation scheme

After two years of illness, the employer’s obligation to continue paying wages ceases. Nevertheless, the employment relationship often remains formally in place, without pay and without reintegration obligations – a so-called dormant employment relationship. This practice arose following the introduction of the Work and Security Act in 2015, when employers sometimes deliberately maintained employment relationships to defer payment of the transition allowance.

If an employer terminates an employment contract after two years of incapacity for work, they are liable to pay a transition payment. Until 1 July 2026, large employers can still have this payment reimbursed via the UWV, but this scheme will then lapse. This makes it particularly important to terminate dormant employment contracts in good time. After all, waiting can lead directly to higher costs.

New developments

A new development has now arisen. The District Court in Rotterdam has referred a question for a preliminary ruling to the Supreme Court regarding the accrual of holiday entitlement during a dormant employment contract. The question is: “Does an employee on sick leave – contrary to the provisions of Section 7:634(1) of the Dutch Civil Code – accrue holiday entitlement based on their wage value during a dormant employment contract?”

The law (Section 7:634 of the Dutch Civil Code) regulates the accrual of holiday entitlement during illness, but does not provide a clear answer for the period following two years of illness, when, in fact, no further wages need to be paid. This has led to divergent rulings by courts and disagreement in the legal literature.

The case before the District Court of Rotterdam, which gave rise to the preliminary question, concerned an employee who claimed payment for holiday entitlement allegedly accrued during the period after the obligation to continue paying wages had ended, but before the employment contract had been terminated.

Possible consequences for employers

If the Supreme Court rules that holiday entitlement does indeed continue to accrue during a dormant employment relationship, this could have significant financial consequences. Employers would then be required to pay out the holiday entitlement upon the termination of the employment relationship. Combined with the expiry of the compensation scheme, a dormant employment relationship could therefore become a costly affair.

Until the Supreme Court (and possibly subsequently the European Court of Justice) provides clarity, uncertainty will remain. It is therefore advisable, where possible, to terminate the employment of employees on long-term sick leave in good time once the two-year period of illness has elapsed and reintegration is no longer an option. In doing so, employers can avoid potential additional (financial) obligations, such as the payment of holiday entitlement accrued during the ‘dormant’ period. Furthermore, in many cases, large employers can still make use of the UWV’s compensation scheme until 1 July 2026.