Your lawyerJan Dop, LL.M.
Jan Dop assists national and international enterprises in all facets of their day-to-day business operations. He specializes in personnel, real estate and issues involving public authorities. Jan is Head of our Embassy Desk, that serves Embassies, Consulates, diplomats and expats. He has been a lawyer at Russell since 1995, and became a partner in 2011.
t: +31 20 301 55 55
Penalty clause and compensation by employees
Which requirements does a penalty clause have to meet? Can you, as an employer, claim compensation in addition to a penalty?
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.
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.
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.
- 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.
Would you like to learn more about penalties and compensation by employees? Would you like us to draft a penalty clause or an employment contract for you? Please contact us:
We process the personal data below with your permission. You can withdraw your permission at any time. For more information please see our Privacy Statement.
Please fill in the form below and we will call you as soon as possible.