Early termination of a fixed term employment agreement

A recent case of the Court of Appeal of The Hague involved a fixed-term employment agreement without an early termination option.  This means that, in principle, both parties must ‘serve out’ the employment agreement until the end date. If one of the parties nevertheless terminates prematurely, he/she is liable for damages.

In this case, the employee terminated the employment agreement early nevertheless. But the Court of Appeal ruled that this employee was not liable for full damages for irregular termination because the employer did not properly inform the employee about the consequences of his termination.

More often, we see the importance of properly and transparently informing the employee as an employer recurring in case law, do you take this adequately into account?

Fixed-term employment agreement

A fixed-term employment agreement entails that the employer and employee have agreed upon a fixed period during which the employee will perform work. In principle, this contract cannot be terminated any time earlier than the agreed end date. Neither the employee nor the employer may therefore prematurely terminate the fixed-term employment agreement. If this does happen, the terminating party will have to pay a compensation to the other party. This compensation is called the ‘fixed compensation’. The amount of the fixed compensation is equal to the salary over the period for which the employment agreement would have continued until the moment it would have ended by operation of law. If the employer terminates the employment agreement prematurely, it pays compensation equal to the remaining wages. The employee must also pay the employer compensation based on his remaining salary if the employee terminates the employment agreement early.

Early termination clause

An early termination clause offers the possibility to terminate the fixed-term employment agreement earlier, without owing this compensation.  In practice, this clause is regularly included in fixed-term employment agreements. This allows both the employee and the employer to terminate the agreement earlier, taking into account the applicable notice period. Note; when terminating the employment agreement early, the employer is bound by the usual rules of dismissal law, i.e. the employer must have reasonable grounds and permission from the subdistrict court or UWV to terminate the employment agreement early.

Mitigation of the fixed compensation

The Hague Court of Appeal recently ruled that the fixed compensation owed by the employee to his former employer needed to be mitigated. This employee terminated his fixed-term employment agreement early, despite the fact that no early termination clause had been concluded. The employer indicated that early termination was not possible, but could agree to the termination if the employee agreed to a relationship and non-competition clause for 2 years. The parties conducted negotiations but failed to reach an agreement. The employer then withdrew its proposal and notified the employee that the employee still owed € 9,566.77 in fixed damages for the early termination.

As no early termination clause had been agreed, both the court and the court of appeal ruled that the employee’s termination was irregular. Therefore, the employer was entitled to fixed damages for the period over which the employment agreement would have actually continued.

However, the Court of Appeal mitigates the compensation to be paid by the employee. The reason for this mitigation is that, between the termination and the end date, the employer did not clarify the (financial) consequences of this irregular termination to the employee. Only by letter upon withdrawal of his proposal, did the employer inform the employee about the compensation due and its amount. To that extent, the employer did not give the employee the opportunity to think about the consequences of the termination, seek legal advice and reconsider his termination. In line with the employee’s request, the compensation is moderated to 3x his gross monthly salary (€ 7,700.19 gross).

For you as an employer

If you enter into a fixed-term employment agreement with your employee(s), it is wise to consider whether you want to include the possibility of terminating the employment agreement early. Including an early termination clause gives both you and the employee the option to terminate the employment agreement prior to the agreed upon end date. If an employment agreement is concluded without an early termination clause, you should be aware that early termination of the contract is only possible for both parties against payment of wages for the remaining contractual period. In case the employee terminates the employment agreement irregularly, it is also important that you inform your employee of the consequences. If you fail to do so, the fixed damages payable by the employee may be mitigated.

Helene Pruymboom

Published On: 6 May 2024

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