Penalty clause

A penalty clause is a provision for violating established rules and agreements in an employment contract. If an employee violates regulations or fails to fulfil obligations, an employer may impose a penalty on the employee.

What is a penalty clause?

A penalty clause is a clause in an employment contract in which the employer and employee agree that the employee must pay the employer a penalty if they fail to comply with certain agreements. The employer decides whether the penalty will actually be imposed. Which regulations can be subject to a penalty clause and what conditions are attached to the imposition of a contractual penalty?

Examples of penalty clauses

There are many applications for a penalty clause in an employment contract. In practice, the penalty clause is often linked to the employer’s rules of conduct. In addition, a penalty clause is a recurring feature of, for example, a non-competition clause, a relationship clause or a confidentiality clause.

A penalty clause is agreed, for example, in the event of a breach of:

• safety regulations

• the sick leave protocol

• a smoking ban

• a confidentiality obligation

• a non-competition clause

• the internet protocol

• a relationship clause

Difference between a penalty and compensation

A penalty is intended as a warning and incentive for the employee to comply with the rules. In addition to a penalty for the above violations, the employer may also claim separate damages if the employee has caused damage through intent or recklessness.

Conditions for a penalty clause

There are various conditions attached to the drafting of a penalty clause in the employment contract. These general rules serve in particular to protect the employee on whom the penalty may be imposed.

A contractual penalty must meet the following requirements:

1. The penalty clause must be agreed in writing in the employment contract or in a document to which the contract refers, such as staff regulations or a collective labour agreement.
2. The provisions of the clause must be clearly defined, both in terms of the conditions to which the penalty applies and the amount of the penalty.
3. The amount of the penalty payable by the employee is limited for employees who earn the minimum wage. In that case, the weekly penalty may not exceed half a day’s (working day’s) wages.
4. The purpose of the penalty must be specified. If an employee earns the minimum wage, the penalty may not benefit the employer, but must be paid to an agreed purpose, such as a charity or a blocked account from which the funds benefit (all) employees. If the employee in question earns more than the applicable minimum daily wage, the above requirement regarding the maximum amount of the penalty may be deviated from. However, a judge has the authority to reduce the penalty at the employee’s request.

Conditions for collecting contractual penalties

Has there been a breach of the penalty clause? If so, the employer may impose a penalty on the employee. The employer will determine what action to take based on the situation. The employer may choose to impose the penalty or, in the event of damage, claim compensation. It is not permitted to claim both a penalty and compensation for the same offence. The employer can collect the contractual penalty by deducting the penalty owed from the employee’s wages or salary.

Have your penalty clause drawn up or reviewed

The laws and regulations surrounding a penalty clause in an employment contract are not straightforward. In addition to the general regulations, special regulations may also apply depending on the situation. For example, a penalty may be unreasonable in individual cases. A collective labour agreement may also prohibit certain penalties. It is therefore important to seek proper advice. A penalty clause that is not correctly drafted may result in the employee avoiding the penalty. Our specialists in employment law are happy to assist you and, if desired, can advise you on drafting a penalty clause or review a penalty clause for you.

Frequently asked questions / FAQs about penalty clauses

What are the consequences of an incorrectly drafted penalty clause?

An incorrectly drafted penalty clause can have serious consequences. There is a risk that the penalty will be annulled in whole or in part or moderated by the court, thereby negating the intended protection and incentive to comply. A penalty clause must be clearly and specifically worded, both in terms of the violation and the amount of the penalty. In employment contracts, additional requirements apply, such as written documentation. And did you know, for example, that in principle a penalty may not be to the benefit of the employer? This is only permitted if the employee earns more than the minimum wage and the destination of the penalty is also explicitly stated in the clause. If the penalty clause is not correct, it may lose its force in a conflict and the employer will be left without an effective means of addressing damage or non-compliance. Careful wording is therefore essential to strengthen your position and avoid legal problems.

Can an employer demand both a penalty and compensation for the same incident?

In principle, an employer cannot simply demand both a penalty and compensation for the same incident. An employee who pays a penalty is, in principle, not also liable for the same conduct, unless the compensation relates to additional or other damage not covered by the penalty. To avoid problems, it is important to carefully describe in the employment contract that the fine is intended as an incentive to comply and that separate compensation remains possible for actual damage that exceeds the fine.

Why is legal advice important when drafting a penalty clause?

Legal advice is essential when drafting a penalty clause, because an incorrectly worded clause may lose its validity or its effect may be limited. Dutch law imposes specific requirements on penalty clauses, particularly in employment contracts. Without legal advice, you run the risk of the clause being annulled or moderated by the court, leaving your organisation insufficiently protected against undesirable behaviour or damage. A solicitor will ensure that your penalty clause is legally watertight, workable and effective.

Authors: Employment law solicitors Judy Sliepen and Myrddin van Westendorp