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A non-compete, ancillary employment, or confidentiality clause is often toothless without a penalty clause: without a penalty, compliance with these agreements is virtually impossible to enforce. The court recently confirmed this when an employer was unsuccessful because a penalty clause was missing. Below, you can read why a penalty clause is essential and how to make your employment contract watertight.
Which clauses are often found in an employment contract?
An employment contract often contains clauses that protect the employer:
- Non-compete clause: the employee may not work for a competitor or start a competing business after the employment ends, to prevent trade secrets, customers, and strategies from falling into the hands of competitors.
- Ancillary activities clause: the employee may not engage in other (paid) activities without permission, in order to prevent conflicts of interest and reduced performance
- Confidentiality clause: the employee does not share confidential information, such as trade secrets or customer data.
Why is a penalty clause essential?
A penalty clause stipulates a fine for failure to comply with certain obligations, such as the confidentiality clause. It is important that the fine is high enough to deter, but at the same time remains reasonable. Without a penalty clause, it is often very difficult to enforce compliance with the other clauses — they lack their “teeth”.
A case (ECLI:NL:GHSHE:2023:1585) illustrates this: a departing employee with both a non-competition and a confidentiality clause went to work for a competitor. The former employer demanded a penalty payment, but the judge objected to the absence of a penalty clause.
Frequently Asked Questions
What is a penalty clause?
A clause that imposes a penalty for violating an agreement, such as a non-compete or confidentiality clause. It makes those agreements enforceable.
How high can the fine be?
High enough to deter, but reasonable. An excessive fine can be reduced by the judge.
Is a non-compete clause without a penalty clause worthless?
Not necessarily worthless, but difficult to enforce. Without a penalty clause, enforcement can fail, as the case discussed shows.
Does a penalty clause also apply to a confidentiality clause?
Yes, that is precisely where it is useful: violations are difficult to express in monetary terms, and a predetermined fine makes enforcement easier.
Make your employment contract watertight
The absence of a penalty clause can cost your company dearly. We draft and review employment contracts so that your clauses have the necessary teeth and truly protect your business.
Our employment law are happy to assist you. Schedule a no-obligation intake consultation.
