The Liquidated Damages Clause in the Individual Employment Contract - Romania

The liquidated damages clause is the ancillary convention allowing the parties to determine in advance the amount of the damages incurred by the lender as a result of the borrower’s failure to fulfill or of the borrower’s delayed or inappropriate fulfillment of its obligation.

Having regard that the defaulting party or the party that delays the fulfillment or inappropriately fulfills its obligations under the individual employment contract may be either the employer or the employee, we shall analyze the particularities of the liquidated damages clause admissibility both in the case where the injured party is the employee and in the case where the injured party is the employer.

Liquidated damages clause in favor of the employee

According to the provisions of art. 269 (1) of the Labor Code, “the employer shall be bound, under the contractual civil liability rules and principles, to indemnify the employee in case that the employee incurs a material damage from the employer’s fault during the performance of the employee’s job duties or in relation to the employee’s job”. Consequently, the patrimonial liability regulated by the Labour Code is, in legal terms, a form of contractual civil liability, having certain particularities generated by the specific features of the employment relationships.

The amount of the damages due by the employer shall be subject to the contractual civil liability principles and shall be set in one of the following ways: in court (judicial assessment), by law (legal assessment), by the parties’ convention (conventional assessment). Whereas art. 269 (2) of the Labor Code provides that “in case of the employer’s refusal to indemnify the employee, the employee may file a complaint to the relevant courts", thus indirectly referring to the parties’ agreement, in our opinion the liquidated damages clause which allows the parties to set in advance the amount of the damage incurred by the employee is also admissible and may be included in the individual employment contract, either upon the conclusion thereof or later. The court may reduce the liquidated damages clause set forth in favor of the employee if its amount is excessive, breaches the equity and good faith principle and leads to profiteering by the beneficiary thereof.

Liquidated damages clause in favor of the employer

Regarding the liquidated damages clause set forth in favor of the employer, we should specify right from the start that there is no explicit legal rule prohibiting the insertion of such clause in an individual employment contract.

Therefore the specialized doctrine includes various opinions regarding the admissibility or inadmissibility of such clause.

A first opinion specifies that in case of the employee’s liability against the employer the liquidated damages clauses are inadmissible, being null and void.

A first argument supporting this opinion consists in the fact that according to art. 281 of the Labor Code, together with art. (67) of the Law no. 168/1999, the patrimonial liability of the employee may be raised only in court.

A second argument is that such clause provided in favour of the employer implies that the employer is exempted from the obligation to prove the damage. But art. 38 of the Labour Code does not allow the employee to waive from his/her right, correlative to the obligation to prove, obligation that falls upon the employer, under art. 287 of the Labour Code.

This solution is also supported by the fact that many texts of the Labor Code make reference to the courts, establishing this way the judicial solution, whenever it is about the mutual claims of the parties to the legal relationship of employment.

A second opinion specified by the doctrine consists in the admissibility of the liquidated damages clause in principle and in the assumption in question, under certain circumstances.

Therefore there is specified that if the damage incurred by the employer is below the level of the liquidated damages clause, such clause shall be efficient only up to the actual level of the damage. But if the contract does specifically mention that the application of the liquidated damages clause is not subject to the actual level of the damage, then in legal terms the liquidated damages clause enhances the liability, being valid under the circumstances where such clause is valid in employment contracts. Accordingly, if the damage is higher than the damage set forth by the liquidated damages clause, then the liquidated damages clause shall reduce the liability.

The liquidated damages clause set as percentage quota is not admissible in principle, as the employee is not under any pecuniary obligation. But such liquidated damages clause may be provided in case of the employees who manage amounts of money on behalf of their employer.

Hereinafter we will present the reasons why, in our opinion, it is admissible to insert in the individual employment contract a liquidated damages clause provided in favor of the employer, specifying at the same time the criticism against the opposite solution.

According to the provisions of art. 270 (1) of the Labor Code, “the employees are held liable with their patrimony, under the contractual civil liability rules and principles, in respect of the material damages caused to the employer from their fault and in relation to their job”. According to the civil liability rules and principles, the damage shall be fully covered, meaning that not only the damage actually caused but also the potential lost profit. Having regard to the provisions of art. 270 (1) herein above specified, the employer may not claim non-material damages from the employee in respect of the damage caused.

Even if the Labor Code does not specifically provide the possibility of the parties’ agreement regarding the employee’s liability (as opposed to the employer’s liability, case where, as herein above specified, art. 269 (1) refers to the parties’ agreement regarding the employee’s indemnification by the employer), in our opinion such agreement is allowed, for the following reasons:

1. According to the provisions of art. 295 (1) of the Labor Code, “the provisions hereof are completed by the other provisions of the labor law and, unless incompatible with the particularities of the employment relationships provided herein, by the provisions of the civil law”. The civil liability allows for the payment of the damage caused, as a result of the parties’ agreement.

2. There is no compulsory legal rule forbidding the conclusion of such agreement. Moreover, art. 20 (1) of the Labor Code allows the parties to an individual employment contract to negotiate and insert in such contract specific clauses, as listed to paragraph 2 of the herein above specified article, but without limitation.

3. It is obviously useful to cover the damage by the parties’ agreement, at least in order to avoid a trial, otherwise required. Like any other contract, the obligations under the individual employment contract are not only those specifically included in the contents thereof, but also “all the consequences attached to such obligations by the equity, customs or law” (according to art. 970 of the Civil Code). In addition, the good faith principle, established by art. 8 of the Labor Code, also leads to the possibility of covering the damage by the parties' agreement.

4. Even if art. 164 (2) of the Labor Code provides that “the amounts withheld as damages caused to the employer may not be withheld unless the employee’s obligation is due, liquidated and payable and has been found as such by a final and irrevocable court decision”, the Constitutional Court, by the decision no. 24/2003, specifies that this legal text refers only to the cases where the employee does not willingly cover the damage caused to the employer.

As a consequence of the fact that the parties’ agreement in case of the coverage by the employee of the damage caused to the employer, as expression of the contractual freedom principle, under which the methods to fulfill and extinct the mutual obligations are established, is allowed under the law, the liquidated damages clause allowing the parties to establish in advance the amount of such damage is also admissible.

Nevertheless, such liquidated damages clause should comply with the compulsory requirements provided by the Labor Code in the case of such liability type.

Therefore, we should consider the provisions of art. 273 et seq. of the Labor Code, according to which the employer may recover its claim - representing the coverage of the damage caused by the employee – by withholding monthly amounts from his/her salary; such amounts may not exceed one third of his/her monthly net salary and may not exceed, together with the other amounts withheld from such employee, half of his/her salary (according to art. 155 of the Labor Code, “salary includes basic salary, allowances, benefits and other increments”; therefore all these salary rights are considered when calculating the installment amount).

The aim of the liquidated damages clause is to determine, in advance and conventionally, the damages due for default and the liquidated damages clause shall be due by the defaulting party in case that all the indemnification requirements are fulfilled. Consequently, the employee owes damages and interest only if the conditions of his/her liability are proved, in respect of the breach of the obligations undertaken and of the damage occurrence. Therefore, in our opinion, providing a legally undertaken liquidated damages clause, under which the damage that the employee would cause to the employer is determined in advance, does not infringe art. 38 of the Labor Code. By this legal text, the aim of the legislative was not to forbid any conventions, but only those under which the employee would waive from his/her compulsory rights provided by the law.

The admissibility of the liquidated damages clause in individual employment contracts does not conflict neither with the provisions of art. 287 of the Labor Code, according to which it is the obligation of the employer to provide evidence in case of labor conflicts. Therefore, the liquidated damages clause does not reverse the obligation to provide evidence regarding the existence of the liability relationship, of the employee’s obligation to repair the damage. In fact the liquidated damages clause determines in advance only the amount of the damage, which does not infringe in any way the above specified text.

In conclusion, considering the aforesaid specifications, in our opinion inserting a liquidated damages clause in the individual employment contract is admissible and does not infringe the legislation in force, both in case that such clause is inserted in favor of the employer and in case that it is inserted in favor of the employee.

ABOUT THE AUTHOR: Florina Gradeanu - Gradeanu & Partners
Florina Gradeanu is Managing Partner at Gradeanu & Partners. She has a wealth of experience in corporate law, banking law, as well as project finance, concessions and other forms of PPP projects, notably in the fields of infrastructure and energy.

Furthermore, she has advised clients in relation to complex greenfield and renewable energy projects including the largest onshore wind farm project in Romania. She has as well a broad experience in capital markets, ensuring for many years consultancy services in public offerings, listing procedures and establishment and functioning of investment funds. Other areas of practice are mergers, acquisitions and privatization. She is fluent in English, Italian.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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