(The acronym cao is very widely used.) An agreement establishing, for one or more individual employers or groups of employers and one or more groups of employees, the terms and conditions under which work is performed. The 1927 Collective Agreements Act gives the following definition: "an agreement concluded by one or more employers or associations of employers possessing full legal capacity on the one hand and one or more associations of employees possessing full legal capacity on the other, primarily or exclusively regulating terms and conditions of employment that must be observed in contracts of employment."
The provisions of a collective agreement automatically become a binding part of an individual contract of employment between an employer who is bound by the agreement and an employee who is a member of a signatory union. If the agreement is one setting minimum pay and conditions, any departure from its provisions to the employee's disadvantage is null and void, whereas departures in the employee's favour are valid. If the agreement is one setting standard pay and conditions, any departure from its provisions is null and void.
In addition, Article 14 of the Act obliges employers who are bound by the agreement to comply with its provisions in respect of their non-unionized employees also, unless the agreement itself stipulates otherwise. Employees whose employers are not bound by the agreement are not covered by it, regardless of whether they are union members or not. This situation changes if the agreement is the subject of official extension by the Minister for Social Affairs and Employment (see extension of collective agreements ); its provisions then become applicable to all employers and their employees in the industry or sector concerned.
A collective agreement in the Netherlands is usually concluded for a specified period (one to two years).