Penalty clause and compensation by employees

A penalty clause in an employment contract has the purpose to make sure the employee fulfils his obligations and, additionally, to receive compensation in the event of non-fulfilment. A penalty clause must be agreed upon in writing and in the employment contract must clearly be defined for which violations a penalty is to be paid. It is not possible to impose both a fine and to receive compensation.

Which requirements does a penalty clause have to meet? Can you, as an employer, claim compensation in addition to a penalty?

Penalty clause

A penalty clause is a stipulation of a contract where the parties agree that if one of them does not comply with certain arrangements, requirements or instructions, a certain sum of money has to be paid. This can include violation of rules of conduct, competition clause, non-solicitation clause, confidentiality clause, etc.

Conditions for penalty clause

A penalty clause is subject to certain conditions. A penalty clause must always:

• Be agreed upon in writing
• Refer to the circumstances set out in the employment contract which are subject to a penalty.

There are special additional requirements for employees earning the minimum wage:

• The purpose of the penalty must be indicated.
• A fixed sum has to be included in the same currency as the wages.
• Within a period of one week, an employee must not be imposed a fine amount exceeding half a day’s wage.

If the employee earns more than the minimum wage, these conditions may be deviated from. Any stipulation violating any one of these conditions will be void.

Purpose

Provisions must be made for the purpose of the penalty. The employer (or the person recovering the penalty) may not benefit from it directly or indirectly. However, the penalty may be for the benefit of a good cause, such as a fund or a staff kitty. This may be deviated from if the employee earns more than the minimum wage.

Penalty sum

The employer is free to determine the penalty amount but it can be reduced by the judge, either at request or upon the judges initiative. If the penalty clause meets the requirements for employees with the minimum wage, there is no scope for the judge to reduce the penalty.

How to recover the penalty?

Often, a penalty clause includes that no further notice of default is required to recover the penalty. In practice the employee’s attention will be drawn to the violation and it will be pointed out that as a result payment of the penalty is claimed.

If the employee does not pay the penalty, you can recover the fine in the way that was agreed upon in the contract, for instance through deductions from the salary. If the employee does not agree with the penalty, he can go to court. In the event the employee has left the employment and refuses to pay the penalty, the employer will have to go to court.

Not penalty and compensation

In the event of a violation, the employer can either chose to recover the penalty or claim compensation due to violation of the clause. (if damage is suffered). The employer cannot claim both a penalty and compensation for a violation of the same fact. Clauses in conflict with the latter are void.

What is permitted?

Both a penalty and an obligation to pay compensation can be included in the agreement. However, it must be formulated clearly that the clause is to be understood as penalty or compensation and not as penalty and compensation. In the event of a violation, the employer can choose to claim a penalty or – if the damage suffered is higher than the penalty – claim compensation.

The court is authorised to award upon request of the creditors supplementary compensation in addition to the penalty. This is possible if the damage suffered is higher than the penalty.

For the employer it can be more attractive to collect a penalty. The employer does not have to prove that he has suffered damage and what the damage is. Especially in the event of a violation of non-competition and non-solicitation clauses, it can be difficult to determine the amount of the damage suffered exactly.

Our advice

• Do always include a penalty clause in your employment contract.
• Make sure that each penalty clause complies with the statutory provisions.
• Gain advice on the option to claim compensation instead of a penalty if the damage suffered is higher than the penalty sum.

More information?

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