Penalty Clauses Related to Termination of Employment Contracts in Light of the Unification of Case Law
Introduction
In its decision dated 08.03.2019, numbered 2017/10 E and 2019/1 K. (“General Assembly Decision”) the General Assembly of the Court of Cassation on the Unification of Case Law (“General Assembly”) decided that, “the penalty clause on unjust termination prior to the anticipated term of the contract” in employment contracts that are signed for a fixed-term, but accepted as indefinite-term contracts due to the lack of objective conditions, is valid for the period fixed in the contract. The General Assembly Decision is published in the Official Gazette dated 18.07.2019 and numbered 30835.
Fixed-term, Indefinite Term, and Minimum Term Employment Contracts
Employment contracts may be concluded for a fixed term or an indefinite term, within the limitations prescribed by law. According to Turkish Labor Law (“Labor Law”) numbered 4857, a contract is deemed to be for an indefinite term if the employment relationship is not established for a certain period of time.[1] The general rule is that employment contracts are concluded for an indefinite term; meanwhile, fixed-term employment contracts are subject to certain objective conditions. In order to conclude an employment contract for a fixed-term, the nature of the job to be dealt with should be limited to a certain period; in other words, it should be predictable by the parties when the job will be completed, or the employment contract must be made for the completion of a specific job, or the employment contract must depend on an objective condition, such as the emergence of a particular phenomenon.[2]
The reason why fixed-term and indefinite term employment contracts are subject to different conditions is that legal consequences related to the termination of an indefinite-term employment contract are more in favor of the employee.
Therefore, regardless from the title/name of the contract, and whether a certain period of time is specified, contracts that do not satisfy the objective conditions prescribed in the Labor Law are considered to be for an indefinite term. For the same reason, fixed-term employment contracts cannot be concluded successively unless there is a substantial cause. Otherwise, the employment contract is deemed to be for an indefinite term from the beginning.[3]
In addition, the parties could also conclude a minimum term employment contract. In the minimum term employment contracts, the parties decide upon a minimum term, and cannot terminate the contract within this period. At the end of the anticipated (minimum) period, the contract does not end automatically. If one of the parties does not continue the contract at the end of the minimum period, the contract continues as an indefinite term contract.[4]
Termination of Fixed-Term and Indefinite-Term Employment Contracts and Penalty Clause
Fixed-term contracts expire automatically at the end of the anticipated term without a termination notice. Both fixed-term and indefinite-term employment contracts may also be terminated by the parties’ agreement by means of mutual agreement. However, employment contracts often end through termination. Upon satisfaction of a condition set forth as a reason for immediate termination in the Labor Law, the parties may terminate the contract immediately. If such conditions are not satisfied, the party wishing to terminate the indefinite-term employment contract may terminate the contract by complying with the notice periods set forth in the Labor Law (termination with notice periods).
In addition, the parties include penalty clauses to limit the right of termination in employment contracts. Employment contracts establish a personal relationship between the employee and the employer. Therefore, it is important for the parties to ensure and maintain the trust that the employment contract will not be terminated. Within this scope, the penalty clause provisions included in employment contracts aim to limit the right to terminate the contract by granting a notice period. In terms of fixed-term contracts, the purpose of the penalty clause is to prevent the parties from unjust termination of the contract prior to the anticipated end date. In other words, the main purpose of the parties is to protect the trust of the parties in the performance of the debt in the course of the period prescribed in the contract, and to prevent the termination of the contract unfairly prior to the anticipated term.
Aside from the purpose of preventing the termination of the employment contract without just cause for a certain period of time, penalty clauses are included in the employment contracts in order to enable the employer to request the training expenses from the trained employee in the event of non-compliance with the working conditions, or in order to provide that the employee complies with the non-competition clause.[5]
Although there is no provision in the Labor Law regarding the penalty clauses in employment contracts, Article 420 of the Turkish Code of Obligations provides that penalty clauses which are solely determined against the employee are invalid. As a matter of fact, in accordance with the principle of “interpretation in favor of the employee” in labor law, it is accepted that a penalty clause is valid when it is agreed to be applied to both Parties and thus, the Court of Cassations’ case law leans also in this direction.
As mentioned, above, considering both the employees’ and the employers’ needs and wishes to ensure the continuity of the employment contract, the termination right (with notice periods) of the parties in the employment contracts could be limited by a penalty clause inserted into contracts in a manner that does not violate the essence of the rights.[6] However, the validity of such penalty clauses depends on the absence of justified reasons for termination of an employment contract and the principle of reciprocity. It is also possible to add provisions to this extent to minimum-term employment contracts.
In this context, the General Assembly, in its decision dated 08.03.2019, numbered 2017/10 E and 2019/1 K. examined the validity of penalty clauses entailed to unjust termination prior to the anticipated term in the employment contracts concluded by the parties for a fixed term, but which are accepted as indefinite-term contracts, due to the lack of objective conditions stipulated in Article 11 of the Labor Law, and ruled that the penalty clause is valid, limited to the period in question. Therefore, the doctrinal discussion[7] was over, and the differences of opinion of the Chambers of the Court of Appeals were eliminated.
General Assembly’s Reasoning
In its reasoning, the General Assembly, firstly, indicated that the principle of having an indefinite-term employment contract, whilst having an indefinite-term contract is exceptional, due to the principle of protection of the employee. However, the General Assembly pointed out that the acceptance of the contract for an indefinite term is a determination regarding the qualification of the contract; meanwhile, it should be separately assessed whether the acceptance of the contract for an indefinite term results in invalidity of the penalty clause. In the justification of the decision the following points are also noted:
- The basic principle prevalent in the Turkish Law of Obligations is the principle of freedom of will. The natural consequence of freedom of will is the "freedom of contract" principle. In the Turkish legal system, the principle of freedom of contract is not absolute; it is subject to limitations. The parties may freely determine the content of a contract within the limits stipulated by law. Contracts contrary to the mandatory provisions of the law are null and void.
- However, Article 27/II of the Law of Obligations is as follows: “The null and void part of the terms that a contract include does not affect the validity of other terms. Nonetheless, if it is clearly understood that without such terms the contract would not have been concluded, the entire contract becomes null and void.” Within the framework of this Article, it is possible to declare a part of the contract as null and void while other parts are valid, according to the principle of maintaining the contracts and their validity.
- In the event that the employment contract is concluded for a certain period of time and the “penalty clause related to unjust termination prior to the anticipated end date” is set forth in the contract, even if the contract is considered as an indefinite-term employment contract due to the lack of objective conditions, pursuant to Article 27 / II of the Law of Obligations, partial invalidity sanctions should be applied, and the will of the parties should be given superiority, and provision about the “penalty clause regarding unjust termination of the contracts prior to the anticipated end date,” should be considered as valid for the anticipated period.
- The employer and the employee try to guarantee that the contract will not be terminated for a certain period of time. Therefore, the parties include provisions regarding the penalty clause in order to use it as a means of pressure to ensure that they fulfill their commitments. Defining a fixed-term employment contract as an indefinite-term contract due to the lack of objective conditions, should not result in the invalidity of the will of the parties in relation to the penalty clause.
For the purposes explained, above, the General Assembly decided that the penalty clause aims to guarantee that the contract will not be terminated without just cause for the anticipated period and remains valid, limited to the anticipated term, even if the fixed-term employment contract becomes an indefinite-term contract due to the lack of objective conditions.
The Dissenting Opinions
Two dissenting opinions were drafted in opposition to the General Assembly’s decision. In the first one, the following grounds were stated: Pursuant to Article 11 of the Labor Law, since it is not possible to state any anticipated term in indefinite-term employment contracts, even the discussion of the validity of the penalty clause that is subject to a term is against the law. The purpose of Article 11 of the Labor Law is to protect the employee; however, in the Decision, no specific assessment regarding the penalty clause finds that employee benefits have been made, which may result in consequences against the employee, i.e. the employee may have to pay the penalty according to the Decision. It is possible to establish a minimum-term contract in order to protect the common interests of the parties regarding implementation of a condition anticipating the necessity to work for a given period of time and settlement of a penalty clause regarding the termination prior to the anticipated term. This also needs to be done through the mutual consent of the parties. However, in cases when the condition is invalid, conversion of the contracts considered to be for an indefinite-term pursuant to the first sentence of Article 11 of the Labor Law to fixed-term contracts will be done, as the judicial ruling is not in accordance with the law, and is considered to be theory. Finally, although clearly not stated by the parties, unless a contract is deemed to be minimum term, and the condition of period is explicitly considered to be valid only in terms of the penalty clause, different opinions and practices may emerge in terms of job security, notice pay, residual period wages and, in some cases, even concerning the existence of severance pay rights.
It has been expressed briefly in the other dissenting-opinions that the opinions of both the 9th Chamber and 22nd Chamber are wrong. The 9th Chamber is of the opinion that the penalty clause attached to an anticipated term is invalid if the fixed-term employment contract is considered to be for an indefinite term due to lack of objective conditions; meanwhile, for the same contracts, the 22nd Chamber is of the opinion to the opposite. The dissenting opinion states that such penalty clause should only be applied to the employer. The reasons for such opinion are as follows: This issue should be assessed separately for the employee and the employer. The execution of the penalty clause for both parties is only against the employee, because the amount as stated in the penalty clause may not be considered as an important amount for an economically powerful employer. However, that amount may have significant impact upon a redundant employee. Moreover, a reduction from the penalty clause decided by the judge does not change such situation. In such a case, claiming the opposite of the employment contract, which is always prepared by the employer, is against the principle of good faith. From the perspective of the employee, considering Article 11 of the Labor Law, which aims to protect the employee, holding responsible the employee from the penalty clause is equitable and fairn. The employee could claim his/her rights, as he/she wishes, according to a fixed-term contract, or to an indefinite-term contract. Therefore, the penalty clause that is attached to a term binds the employer, but not the employee.
Conclusion
The General Assembly, through its decision numbered 2017/10 E and 2019/1 K, decided by a large majority that the “penalty clause regarding unjust termination prior to the anticipated end date” is valid, limited to the period in question in fixed-term employment contracts, which are accepted as indefinite-term contracts due to the lack of objective conditions. Through this, the differences of opinion in the doctrine and between the different chambers of the Court of Cassation are eliminated.
[1] Labor Law Article 11/1.
[2] Labor Law Article 11/2.
[3] Labor Law Article 11/2.
[4] Süzek, Prof. Dr. Sarper: İş Hukuku, 2018, p. 252.
[5] Canbolat, Prof. Dr. Talat; Erener, Ebru: “Asgari Süreli İş Sözleşmelerinde Cezai Şart”, İş ve Hayat Dergisi, No. 5, 2017, p. 231.
[6] Süzek, p. 717.
[7] For the opinion stating the validity of the penalty clause please see: 22nd Chamber of the Court of Cassations, E. 2015/18939, K. 2016/26066, 29.11.2016; for the opinion stating the invalidity of the penalty clause please see: 9th Chamber of the Court of Cassation, E. 1993/15152, K. 1993/16726, 17.11.1993.
All rights of this article are reserved. This article may not be used, reproduced, copied, published, distributed, or otherwise disseminated without quotation or Erdem & Erdem Law Firm's written consent. Any content created without citing the resource or Erdem & Erdem Law Firm’s written consent is regularly tracked, and legal action will be taken in case of violation.
Other Contents
Employment relations between the employee and the employer may be terminated for various reasons, as in all other contractual relations. Employment contracts may be terminated through mutual agreement between the parties, as well as through the unilateral termination of...
Today, in many employment contracts, the use of tools such as computers, corporate e-mail accounts, and telephones allocated by the employer is limited and the employer’s right to control them is regulated. The employer bases such a supervise and audit right on the management right regulated under Article 399...
The right to initiate a re-employment lawsuit, is one of the job security provisions, stipulated in favor of the employees, of Labor Law No. 4857 ("Labor Law"). This right, aims to prevent arbitrary termination of the employment contract or termination of the contract without a valid reason by an employer...
The dominant position of the employer due to the nature of the employment relationship, the dependency of the employee, and the obligation to work constitute the basis of the employer's right to manage. The right to manage refers to the right to regulate the conduct of the work and the behavior...
A non-compete covenant prohibits employees from competing on their own or a third party's behalf in the same field of activity as their former employer for a certain period of time after the termination of an employment contract. By the execution of a non-compete covenant...
According to Labor Law No. 4857 (Labor Law), the termination of an employment contract without a valid reason does not automatically invalidate the termination. When an employee opens a re-employment lawsuit pursuant to conditions stipulated in the Labor Law, and if the case...