Penalty clauses in individual employment agreements are not admissible

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

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. The Supreme Court has ruled that such penalty clauses are not permissible in employment agreements.

The decision was issued because previous lower court decisions have not been uniform. Some courts consider such penalty clauses valid and other courts do not. The Supreme Court has, therefore, ruled that the insertion of a penalty clause, either in an individual employment agreement or an addendum, is prohibited where the penalty clause’s purpose is to assess the damage caused to the employer by the employee in default and in connection with the employee's work, and any such clause will be null and void.

Until this decision of the Supreme Court, some labour courts considered such clauses invalid because the Labour Code only provides a general rule stating that the employee is liable for material damage caused to the employer, but without expressly specifying the possibility of setting, in advance, the compensation due by the employee in such cases. To be specific, the underlying argument of such courts was that a penalty clause to assess the damage 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 of other courts for a penalty clause being valid was where, for example, the damage in question, whether economic or physical, had been clearly outlined in the individual employment agreement or addendum. For example, one court 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.

Since there is now no possibility for employers to put pressure on employees with penalty clauses, most frequently met in practice by the use 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.

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.