25.11.2014Interpreting a Contractual Penalty Clause Under Employment Law
A contractual penalty regulated under employment law does not cover a refusal to work which is contrary to the employment agreement if the agreement is "terminated" by the employee without observing the notice period as the Federal Labor Court has now ruled (BAG judgement dated 23 January 2014; Case No.: 8 AZR 130/13).
A contractual penalty regulated under employment law does not cover a refusal to work which is contrary to the employment agreement if the agreement is "terminated" by the employee without observing the notice period as the Federal Labor Court (Bundesarbeitsgericht – BAG) has now ruled (BAG judgement dated 23 January 2014; Case No.: 8 AZR 130/13).
I. Facts of the Case
In the case underlying the judgement the defendant had been employed as a processing engineer at C-GmbH since 2010. The pre-formulated employment agreement provided a notice period of six months for both contractual parties and also included the following regulation:
"If you terminate the agreement without observing the notice period, you are obliged to pay an amount equal to your average daily earnings for the last three months limited however to one gross monthly basic salary, at the most, as a contractual penalty for each day of the premature termination (Beenden Sie den Vertrag ohne Einhaltung der Kündigungsfrist, so verpflichten Sie sich, als Vertragsstrafe für jeden Tag der vorzeitigen Beendigung einen Betrag in Höhe des durchschnittlichen Tagesverdienstes der letzten drei Monate, höchstens jedoch bis zu einem Brutto-Monatsgrundgehalt, zu zahlen)."
After an insolvency proceeding was opened for the assets of C-GmbH on 30 September 2011, and the plaintiff was appointed as the insolvency administrator, the defendant terminated the employment relationship on 11 November 2011, "to the next possible date" and no longer came to work from 1 December 2011, onwards.
Despite numerous requests by the plaintiff to the defendant to fulfill his employment obligations arising from the agreement, the defendant refused to do so since he already had a new employment relationship.
The plaintiff then declared extraordinary termination of the employment relationship without notice due to a persistent refusal to work and asserted the contractual penalty through legal action. The plaintiff stated as justification that the defendant had incurred the contractual penalty by refusing to work, i.e. he was therefore obliged to pay the contractual penalty. He "terminated" the agreement in the sense of the contractual penalty clause with his refusal to work.
In contrast the defendant was of the opinion that he had given due notice to terminate the employment relationship, i.e. with effect to 29 February 2012. On December 1 he had only stopped working. The contractual penalty clause only covered the legal end of the agreement but not the stopping of work.
II. Decision
Like the two previous instances the BAG also dismissed the legal action.
The BAG decided that the defendant had no obligation in the specific case to pay a contractual penalty.
As the BAG initially clarified again, contrary to section 309 No. 6 of the German Civil Code (Bürgerliches Gesetzbuch – BGB) a contractual penalty clause in a pre formulated employment agreement is not generally inadmissible due to the particularities in employment law pursuant to section 310 para. 4 sentence 2, 1st half sentence BGB. However, it is in the employee's interest to apply a strict standard.
The contractual penalty clause included in the defendant's employment agreement would only correspond to the principle of clarity and definiteness in the sense of section 307 para. 1 sentence 2 BGB if the conduct causing the contractual penalty was described in detail.
Against this background the wording "If you terminate the agreement ..." was therefore only valid when limited to the legal contractual end. Extending it to the employee giving due notice, a simple refusal to work or even abandoning the agreement could therefore be excluded since these methods did not end the employment relationship.
Although the plaintiff's termination without notice legally ended the employment relationship in this case, the principle of clarity and definiteness also excluded extending it to the case of termination without notice based on the unjustified and persistent refusal to work.
Simply not doing the work which was owed by agreement did not end the agreement. If the "termination" also covered "not working", the clause would infringe the requirement of transparency in section 307 para. 1, sentence 2 BGB. The contractual penalty was not agreed for termination by the employer. It therefore did not depend on whether the defendant had brought about good cause for extraordinary termination by unjustifiably and persistently refusing to work.
The plaintiff could thus only consider a claim to compensation pursuant to section 628 para. 2 BGB against the defendant.
III. Practical Advice
If an employee terminates his/her employment agreement without observing the applicable notice period or simply no longer comes to work, his/her sudden absence can harm the employer. Although the employer then has the possibility to file a claim for compensation against the employee and terminate the agreement, it is generally difficult to place a figure on the damage incurred so that the employer's claim to compensation will usually be of no value.
In practice employers therefore often add contractual penalty clauses to the employment agreements which oblige the employee to pay a contractual penalty if he/she terminates the employment relationship "contrary to the employment agreement". In previous decisions the BAG has considered such wording to be comprehensible and therefore trouble free.
However, if a contractual penalty clause does not state "termination which is contrary to the agreement" but "termination of the agreement without observing the notice period" as in the instant case, it is at first glance not clear what is meant.
As the BAG ruling shows, courts place very high demands on the legal admissibility of contractual penalty clauses agreed in a standard form so that there can certainly be doubts whether the entire clause is valid due to the high requirements for clarity and definiteness.
Employers should therefore pay attention that the breach of duty described in the contractual penalty clause is defined as accurately as possible.
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