A penalty clause is a provision for violating established rules and agreements in an employment contract. When an employee violates rules or fails to comply with obligations, an employer can impose a fine on the employee for this. The employer decides whether the fine is actually imposed. What exactly is a penalty clause and what conditions are attached to the imposition of a contractual penalty?
What is a penalty clause?
A penalty clause is a clause in an employment contract in which employer and employee lay down the consequences of not complying with agreements made. In law, the clause is described as: ‘A clause stipulating that if the debtor fails to fulfil his obligation, he is obliged to pay a sum of money or another performance, regardless of whether this serves to compensate for damage or merely to encourage performance’ (Article 6:91 of the Civil Code). Freely translated, this means that if a party, for example an employee, fails to comply with the agreed agreement, the other party (employer) must pay a penalty.
Examples of stretches of the penalty clause
There are many examples of stretches of the penalty clause in an employment contract. In practice, the penalty clause is often linked to regulations and order provisions of the employer. In addition, a penalty clause is a recurring part of, for example, a non-competition, non-solicitation or confidentiality clause.
Examples of the penalty clause in an employment relationship include violation of:
- Safety regulations
- Order or work regulations
- Sick leave regulations
- A smoking ban
- A confidentiality obligation
- A competition clause
- An internet protocol
- A non-solicitation clause
- The ban on ancillary activities
In addition to the aforementioned examples involving a contractual penalty, the employer can also claim damages in the event of a breach of contract. Examples of a serious breach of contract include (despite a warning) regularly being late for work, deliberately not performing properly or deliberately disrupting order within the organisation.
Penalty clause in employment contract
Several conditions are attached to drafting a penalty clause in the employment contract. In particular, these general rules serve to protect the employee on whom the fine can be imposed.
A contractual fine must meet the following requirements:
- The penalty clause must be agreed in writing in the employment contract or a document to which the contract refers, such as internal regulations or a collective bargaining agreement.
- The requirements of the clause must be clearly defined, both the terms to which the penalty applies and the amount of the penalty.
- The amount of the fine owed by the employee may not exceed the salary of half a day (working day) per week.
- The fine may not – if explicitly stated in the clause – in any way benefit the employer, but must be remitted. to an agreed destination of the fine, such as a charity or an escrow account whose funds benefit (all) employees.
- If the employer has demonstrably suffered damage, the fine clause can be agreed as liquidated damages, in this case the fine can benefit the employer.
In case the employee concerned earns more than the minimum prevailing daily wage, the above requirement regarding the maximum amount of the fine can be deviated from. However, a judge does have the power to moderate the fine at the employee’s request.
Conditions for collecting contractual fine
Has the penalty clause been breached? Then the employer can impose a fine on the employee. Based on the situation, the employer decides what action to take. In doing so, the employer may choose to impose the fine or, in case of damages, to claim damages. It is not allowed to claim both a fine and damages for the same fact. The employer can collect the contractual fine by deducting the fine due from the employee’s wages or salary. The amount collected is transferred to the appropriate destination.
Penalty clause in a non-competition clause
In practice, a penalty clause is often part of the non-competition or non-solicitation clause. If the non-competition or non-solicitation clause is breached, the employer can force the (former) employee to pay compensation in the form of a fine. Different rules apply in this specific situation: special rules. The fine may be higher than prescribed by the general rules for the fine clause. Also, unlike the penalty clause in the employment contract, it is allowed to claim the penalty or damages.
Damages for deliberate recklessness
Not all fines and damages should be explicitly mentioned in a penalty clause. Does an employee cause damage and does this involve conscious recklessness, intent or gross negligence on the part of the employee? Then the employer can claim full compensation from the employee for the damage caused by the employee. This measure does not have to be explicitly included in an employment contract.
Have your penalty clause drafted or reviewed
The laws and regulations surrounding a penalty clause in an employment contract are complicated. Besides general regulations, depending on the situation, special regulations also apply. The special rules only apply to specific penalty clauses, such as disciplinary fines. It is therefore important to get proper advice. A penalty clause that is not drafted correctly can have major (financial) consequences. Therefore, always consult a lawyer. Our employment law specialists will be happy to assist you and, if required, can give advice on drafting a penalty clause or assess a penalty clause for you.« Back to employment law