Recent rulings of the Slovenian Supreme Court on the permissibility of including contractual penalties in employment contracts highlight that when assessing the permissibility of applying the concept of a contractual penalty, one must consider the subordinate and dependent position of the employee relative to the employer both when concluding the employment contract and during the employment relationship.
A contractual penalty is a civil law concept aimed at securing obligations agreed upon by the contracting parties. The Employment Relationships Act (ERA-1) does not regulate contractual penalties, but it stipulates that general rules of civil law apply mutatis mutandis to the conclusion, validity, termination, and other aspects of employment contracts. However, in assessing the permissibility of applying civil law rules, it must be taken into account that the purpose of mandatory provisions of labor law is to mitigate the subordinate and dependent position of the employee vis-à-vis the employer. Allowing contractual penalties could, therefore, worsen the employee’s position or further strengthen the employer’s position.
The Supreme Court’s judgment VIII Ips 18/2023 adopted the position that a provision in an employment contract imposing a contractual penalty for breach of a notice period is null and void because, unlike liability for damages caused, it represents an excessive intrusion into the employee’s rights and obligations. The existence of damage is not a prerequisite for the right to a contractual penalty to arise.
Similarly, in judgment Ips 25/2023, the Supreme Court ruled that a provision on a contractual penalty agreed upon between the parties if the employee fails to commence work after signing the employment contract or if the contract is terminated at the employee’s will or fault before the start of work or within one month of commencing work as void. An employee enters into an employment relationship voluntarily and freely, and such a contract can be terminated by the employee at any time after its conclusion without legal consequences. This right cannot be limited by time or content conditions. The exercise of the right to terminate an employment contract must be voluntary, depending solely on the free will of the employee.
It is important to add that as early as 2017, the Supreme Court allowed the use of contractual penalties in cases of violating a non-compete clause, which applies to the period after the termination of employment. The court permitted this contractual penalty primarily because the clause deters the employee from violating competition rules after the termination of employment, i.e., when the employee is no longer employed by the employer, and the rules of labor law, including those on employee liability for damages, no longer apply. In this decision, the court also considered that following the termination of the employment relationship, the employee and employer are no longer in a subordinate/superior relationship, and the employer’s position in asserting liability for damages against the former employee is more difficult, especially in terms of proving the damage and its extent.
Finally, let me point out that Slovenian labor law, generally to the benefit of the employee, recognizes the concept of contractual penalties in certain collective agreements, even without an explicit provision in the law, in cases of unlawful termination of employment determined by a final court decision. The purpose of this contractual penalty is to compensate for the general damage caused by the unlawful termination of the employment relationship. Case law is clear about the permissible option to agree on a so-called lump-sum compensation or a contractual penalty in a collective agreement if a court finds the termination of the employment relationship unlawful.
A review of case law shows that the autonomy of contractual parties in labor law is limited, as both the employee and employer must comply with the provisions of the ERA-1 and other laws, ratified and published international treaties, other regulations, collective agreements, and general acts of the employer. With an employment or collective agreement, rights more favorable to the employee than those provided by law can be agreed upon. However, the focus in this matter is not on the limitation of autonomy as it relates to those institutes already regulated by labor law, which also defines possible exceptions. The emphasis is on whether the principles and rules of labor law allow for the (appropriate) application of the rules on contractual penalties.
By Maja Skorupan, Co-Head of Labor and Employment, Law Firm Senica & Partners
This article was originally published in Issue 11.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
