First pageNewsPenalty clauses in individual employment agreements are not admissible

Penalty clauses in individual employment agreements are not admissible

On May 20, 2019, the High Court of Cassation and Justice of Romania issued a preliminary ruling on a legal issue approached unevenly in decisions issued by the labour courts to date.

Thus, according to an official release published on the website of the High Court of Cassation and Justice (the Supreme Court), the possibility of introducing a penalty clause in individual employment agreements has been definitively settled and the Supreme Court ruled that such penalty clauses are not admissible in employment relations.

The decision was issued given that previous court decisions have not been uniform: there are courts that consider such penalty clauses valid and courts that do not. The Supreme Court has ruled that the insertion of a penalty clause, in an individual employment agreement or an addendum, is prohibited. Where the penalty clause it is to assess the damage caused to the employer by the employee in default and in connection with the employee's work, it is prohibited, and the clause is null and void.

Until this decision was issued by the Supreme Court, some labour courts considered such clauses  invalid because the Labour Code provides a general rule according to which the employee is liable for material damage caused to the employer, without expressly specifying the possibility of setting, in advance, the compensation due by the employee in case of the breach of an obligation. To be specific, the underlying argument of such courts was that a penalty clause stipulated in an individual employment agreement will not be effective and the employer should have to prove the extent of any damage.

The core reasoning for a penalty clause being regarded as valid by some courts was where for example, if the damage in question, economic or physical has been clearly outlined within the individual employment agreement or addendum. For example, some courts considered a penalty clause valid when the employer invoked it, following a predetermined amount and agreement within an addendum, when an employee failed to turn up for work several times, without reason. The court in such a matter held the penalty clause valid.

Since there is now no possibility for employers to put pressure on employees with penalty clauses, most frequent met in practice in the case of confidentiality covenants, non-compete covenants or other important obligations for protecting employers, there will now be a need to find other ways to make employees aware of the importance and consequences of certain core duties. These may be for example including in employment contracts clauses setting out the possibility of criminal liability or other type of clauses, depending on a case by case basis.

The decision of the High Court of Cassation and Justice is to be published in the Official Gazette with all the reasoning for it and will be binding from the date of publication.

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