Violation of conditions in the employment agreement is often made subject to a penalty. The most well-known example is the penalty attached to a non-competition clause. Violation of a confidentiality clause, a prohibition on ancillary activities or a non-solicitation clause may be made subject to penalties as well. Are penalty clauses in employment agreements valid? Could an employer actually claim payment of such penalties, or are these often mitigated by the court?
validity requirements
First and foremost, a penalty clause must have been agreed upon in writing. It may – for example – be part of the employment agreement, but may also be included in the company regulations or the personnel handbook. It must in any case be clear which violations are subject to the penalty clause. The amount of the penalty must be stated in the penalty clause as well.
In addition, for penalty clauses pertaining to matters other than non-competition clauses, the law stipulates that the penalty “may not benefit the employer personally”. Furthermore, the law stipulates that the penalty amount per week may not exceed half a day’s pay. The latter two restrictions only apply if the employee receives the statutory minimum wage. For all other employees, the penalty clause may be different in the following respects: the penalty may benefit the employer directly and may be considerably more than the daily maximum. In such case, such derogations from the standard statutory regulations do have to be laid down in writing in the penalty clause.
payable?
It turns out that in practice, many employees do not take penalty clauses seriously (enough). They assume the penalties will only be payable if the court gets involved. While the mere violation of a prohibition in the employment agreement that is subject to a penalty does not provide the employee with an enforceable judgement, the penalty is incurred straight away. Its payability is not subject to an advance warning.
If the underlying condition is valid and the violation of the condition is proven, the penalty is – in principle – incurred. In such case, the only question that remains is whether the penalty is subject to mitigation.
mitigation?
Penalties contained in employment agreements can be extremely high. An employee may – for example – be liable to pay EUR 5,000.00 for violating a non-competition clause, and EUR 1,000.00 for every day the violation continues. For most employees, such penalties quickly become too high. However, in proceedings, the penalties demanded by employers often amount to tens of thousands of euros. If the court finds that the prohibitory provision has been violated, it will in principle impose the agreed penalty, unless, in the relevant circumstances, this would result in a manifestly unreasonable outcome. According to the Supreme Court, courts must be careful in mitigating penalties, and these may only be mitigated if “the rules of fairness manifestly require this”. In practice, many penalties are eventually mitigated, but the remaining amounts can nevertheless be considerable. In addition, in some cases, the court does not mitigate the penalty at all. This may be the case if the employee knew that he had violated the provision and, despite receiving a warning from the former employer, did not discontinue the competing activities. In such cases, the penalties can be very high.
tips for employers and employees
for employers:
- make prohibitory provisions in the employment agreement subject to a penalty
- do not state in the penalty clause that the penalty is “not subject to mitigation”; this is unlawful and, in some cases, it caused the court to find the entire penalty clause to be invalid.
- warn the employee in advance, or in the event of a violation. While this may not be a requirement for the payability of a fine, in court decisions, the fact that the employee had been warned has been successfully used as an argument for not mitigating the penalty.
for employees:
- take penalty clauses seriously.
- discontinue the forbidden activities after receiving a warning, unless you have very well-founded reasons for expecting the clause to be found invalid. In the event of doubt, consult an expert first.
Information
If you require further information in connection with this article, you can contact Mieke Bestebreurtje.
