Contractual penalties in employment contracts – are they admissible?

Contractual penalties in employment contracts – are they admissible?

Contractual penalties intend is to protect the obligations agreed by the parties to the contract. But in labour law or employment contracts, contractual penalties are not permissible – except in the case of an exception!

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Contractual penalties in the contract of employment – are they permissible?

The contractual penalty is an institution of obligations and civil law. It is there to protect or consolidate obligations that parties of the contract agreed on. The parties thus agree that the party in breach of a particular contractual obligation will be obliged to pay a specific monetary amount to the other party. Payment of the agreed contractual penalty may be requested by the party whose contractor has breached his contractual commitment. Are contractual penalties permissible in employment law or employment contracts?


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Contractual penalties in employment contracts

In practice, it is often the case that the employer also determines in the draft contract of employment a certain amount of the penalty that the worker would be liable to pay in the event of a breach of an individual employment obligation. However, the question arises as to whether such an agreement is valid at all in the employment contract. The Employment Relations Act (ZDR-1) provides that the general rules of civil law are to apply mutatis mutandis to the reasoning, validity, termination and other issues of the employment contract. However, this applies only where the ZDR-1 does not have any other specific provisions on a particular issue.

However, since ZDR-1 limits the liability of workers solely to the compensation of the damage actually caused, it is not possible to enforce a civil agreement on a contractual penalty in employment relationships.

Account must be taken of the provisions on the compensation liability of a worker in an employment relationship. Those are softer than general provisions of restitution law. It, therefore, took the view that an agreement which would have provided for a contractual penalty was inadmissible in labour law.

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Exception — contractual penalty for infringement of the competition clause

However, contractual penalties in the employment contract are exceptionally permissible in the event of a breach of a competition clause (but not a competitive prohibition). ZDR-1 does not limit the claims made available to the contracting party in the event of a breach of a competition clause. Therefore, the Supreme Court of the Republic of Slovenia has taken the view that a contractual penalty agreement is also valid in the event of a breach of a competition clause. An important argument for such a position is also the fact that the competition clause is valid for the period after the termination of the employment relationship. This means that it is not subject to provisions of labour law which are in favour of workers.


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