It is not unheard of in Germany that an employee and employer agree on a start date, but as soon as the start date arrives, the employee is nowhere to be seen (probably because he found a better position in the meantime). What can the employer do to protect himself against this? Often employers will include contractual penalty clauses in employment agreements. The contractual penalty clause sets forth that if an employee fails to satisfy a term of the employment agreement that is subject to the penalty, the employee will be required to pay to the employer the agreed financial penalty. This device is most commonly used if an employer would otherwise have difficulty in proving the actual damages suffered as a result of the employee’s breach, e.g., if the employee failed to begin his employment on the agreed date or if the employee breached his post-termination non-compete obligations.
However, the enforceability of contractual penalties is not as clear as it used to be, at least when used in standardized employment agreements. Employers have a knack for using standardized agreements primarily because its easier and because these agreements have passed the test of time. Users of these types of agreements should, however, take note that particular types of clauses in standardized agreements are unenforceable. Ever since January 1, 2002—the date on which Germany’s legislature introduced significant amendments to the Civil Code — there has been a good amount of discussion as to whether contractual penalties in standardized employment agreements were enforceable.
Prior to January 1, 2002, the Act on Standard Terms and Conditions (the statute that governed standardized agreements) specifically set forth that its terms did not apply to employment agreements. However, most of the provisions of the Act on Standard Terms and Conditions were reintroduced into the Civil Code on January 1, 2002. One key provision that does not reappear in the amended Civil Code is the paragraph that states that the provisions concerning standardized agreements do not apply to employment agreements. Instead, Section 309 No. 6 of the Civil Code clearly states that contractual penalties are not enforceable if they are included in a standardized agreement.
It would seem at first that employers could therefore no longer rely on contractual penalties in standardized agreements. However, fortunately for employers, the German legislature did leave an opening. Section 310(4) of the Civil Code states that "the particularities of employment law" shall be taken into consideration in determining whether a contractual penalty is enforceable. Pursuant to a March 4, 2004, Federal Labor Court decision, this statutory carve out language must be understood to mean that, since an employee cannot be subject to contempt of court charges or be required to provide specific performance, i.e., be required to perform work duties, if he breaches an obligation vis-à-vis the employer, contractual penalties should continue to be available to employers. To hold otherwise would tilt the playing field too far in favor of employees. Though the Federal Labor Court’s opinion involved an employee who failed to appear for work on the agreed starting date, employers should be able to assume that a contractual penalty—so long as the penalty amount is reasonable—will also be enforceable if it relates to a post-termination non-compete clause.
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