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Among other things, a contractual penalty is attached to non-compete agreements, recruitment and poaching restrictions, and confidentiality obligations. A contractual penalty is an agreed-upon consequence of a breach of the terms.
In practice, a contractual penalty refers to a predetermined monetary amount that an employee must pay if they violate a term of the contract. If no contractual penalty has been agreed upon, a breach of contract may result in liability for damages.
A contractual penalty differs from damages in that, when claiming a contractual penalty, the employer does not need to prove that the employee caused harm through the breach. For this reason, contractual penalties are often strict conditions. A contractual penalty thus serves as an effective deterrent.
How much can a contractual penalty be?
There are no provisions regarding the maximum amount of a contractual penalty, except in the case of a non-compete agreement. A contractual penalty equivalent to no more than six months’ salary may be agreed upon for a non-compete agreement. This maximum amount may be exceeded if the employee holds a managerial position or is in an independent position equivalent to a managerial one.
A contractual penalty must always be reasonable. In certain situations, an unreasonably high contractual penalty may be subject to negotiation. However, such negotiation is not automatic, and one cannot rely on the penalty being reduced to a reasonable level. It is therefore essential to strive to avoid contractual penalty clauses or to agree on reasonable amounts.
