Employment contracts: What you should know about contractual penalties

Paying money to the employer? This may sound adventurous for employees at first. However, it is not uncommon for employers to include a clause in employment contracts stating that a contractual penalty is due if employees violate certain rules listed in the contract. But when is a contractual penalty actually permissible - and how high can it be? Answers to the most important questions.

When are contractual penalties conceivable?

"Contractual penalties are generally possible under civil law," explains Tjark Menssen from DGB Rechtsschutz. They are applied when at least one party is threatened with high damages if the other contracting party does not fulfill or otherwise violates its contract. "Because the amount of damages is generally difficult to quantify and difficult to prove, a contractual penalty is a manageable regulation," says Menssen.

Employers usually want to use a contractual penalty to ensure that employees comply with the employment contract. "In the vast majority of cases, such a clause serves as a deterrent," says Düsseldorf employment law expert Ulrich Sittard from the law firm Freshfields Bruckhaus Deringer.

Employees should, for example, comply with their confidentiality and non-disclosure obligations. Such clauses are common, primarily at management level - in almost all sectors, "particularly in the areas of IT and technology as well as research and development", says Sittard. But also in retail, for example.

However, penalties are often also agreed in the event that employees do not take up a job in the first place. Sittard gives an example: a person has signed an employment contract promising to start a new job on January 1 of a certain year - but does not show up because, for example, they have a better job offer in the meantime.

On the one hand, the employer then has to spend more time and money on advertising the job and carrying out the application process. On the other hand, it can also lead to losses because the employer is unable to meet its contractual obligations to third parties without the employee. "The situation would be similar if an employee resigns without cause for immediate dismissal without observing their notice period," explains Menssen.

When is a contractual penalty permissible?

"It is permissible if the breach of contract is clearly recognizable to the employee," says Menssen. This requires crystal-clear provisions in the employment contract. It must state unambiguously in which cases the employee is in breach of contract and may have to pay. "A contractual penalty for not working properly, for example, would be inadmissible," says Menssen.

In general, the following also applies: contractual provisions cannot be made unilaterally. "The employee must say yes to the contractual penalty in the employment contract," emphasizes Sittard.

How high can the contractual penalty be?

That depends on the individual case. "Three months' gross salary as a contractual penalty is quite common, but can be deemed unacceptably high by labor courts in individual cases," says Sittard. If someone does not take up a position for which a probationary period with a 14-day notice period was agreed, one month's gross salary would not be appropriate as a contractual penalty because the notice period was only half as long.

What can employees do if the employer imposes a contractual penalty but this is not comprehensible to the employee?

Advice - for example from the works council, legal protection insurance or a specialist lawyer for employment law - is always recommended. Otherwise, it is not necessary to take action. "It is the employer who has to enforce their claim for a contractual penalty," says Menssen. If expert advice shows that the claim is unjustified, it is the employer who has to go to court.