07.11.2022

Authors: Atty. Sema Çelebi, Int. Atty. Murat Emre Yıldırım

The parties of an employment contract may insert a penal clause in the contract in order to protect themselves from possible problems that may occur in the future. Penal clauses may be determined while the employment contract is in progress or they may also be determined as covering the period after the employment contract is terminated. However, unilateral penal clauses against the employee are controversial due to Article 420 of the Turkish Code of Obligations (hereinafter referred to as “TCO”) numbered 6098.  

1-   Unilateral Penal Clause Against the Employee Regarding the Prohibition of Competition

Under  Article 444 of TCO, the prohibition of competition in employment contracts is defined as “The employee who has the capacity to act may undertake, in writing, to refrain from competing with the employer in any way after the termination of the contract, especially opening a competitor business on his own account, working in another competitor business or otherwise engaging in any other kind of interest relationship with a competitor business.”

The duty of loyalty arising from the establishment of the employment contract is the duty of the employee to protect and observe the interests of his/her employer. Non-compete obligation, on the other hand, is a sub-obligation included in the employee's duty of loyalty to the employer, which is one of the results of the employment contract. There is no need to specify a separate penal clause in the employment contract, since the employee's non-compete obligation with his/her employer while the employment relationship is continuing shall be considered within the direct obligation of loyalty. However, the parties may decide to include a provision in the employment contract stating that the employee shall not compete after the termination of the employment contract while the employment relationship continues or to conclude a separate contract (non-competition agreement) in this regard. The sanction stipulating a certain payment agreed by the parties related to the violation of the prohibition of competition is a penal clause in its nature.

The employer has the right to terminate the employment contract with just cause, in case the employee acts in violation of the duty of loyalty and does not comply with the prohibition of competition. In addition to this, the employer can claim all the damages he/she has suffered from the employee in accordance with the provision stated underthe Article 400 of TCO as “The employee is responsible for all kinds of damage before employer caused by his/her own fault”. However, since the obligation of loyalty shall end with the termination of the employment contract, employers who do not want their employee(s) to work in a competitor business or on their own account in a way that will harm the employer must insert a penal clause regarding the prohibition of competition in the employment contract for the period after the employment contract is terminated.

Under normal circumstances, the penal clauses to be determined unilaterally are not valid pursuant to the provision "Unilateral penal clauses against the employee in the service contracts are invalid." under the Article 420 of TCO titled "Penalty clause and release". However, the penal clause to be determined regarding the prohibition of competition constitutes an exception to Article 420 of TCO since the penal clause for non-competition is within the scope of the obligation of loyalty.

Pursuant to the Court of Cassation’s established case law, the penalty clause stipulated in the non-competition contracts for the period after the termination of the employment relationship does not have to be mutual. Considering the decision of the 11th Civil Chamber of the Court of Cassation dated 18.09.2017 and numbered B. 2016/1821 and D. 2017/4467;

“(…) The "legal validity" of the prohibition of competition in the service contract between the parties, as well as the penal clause in case of violation of this prohibition, should be determined according to the provisions of the Law numbered 818. The conditions under which non-competition can be stipulated in service contracts are regulated in Articles 348 et al. of the Law numbered 818. Especially under the Article 351/2, it is clearly regulated that a penal clause may be decided in case of violation of the prohibition of competition. Considering that in the Law numbered 818 there are no provisions that may result in the invalidity of the penal clause which shall be applied in case of violation of the prohibition of competition in the contract, in particular, the Law numbered 818 does not contain provisions similar to Article 20 of the Law numbered 6098 on general transaction conditions and Article 420 regarding the invalidity of unilateral penal clauses against the employee in service contracts; contrary to the court's acceptance, the unilateral prohibition of competition regulated in the contract and the penal clause stipulated in case of violation of this prohibition cannot be said to be invalid.

As seen in this precedent of the Court of Cassation, it is possible to determine a unilateral penal clause against the employee regarding the prohibition of competition. Another point to be mentioned here is that in cases where there is a provision regarding the prohibition of competition in the service contract, it should be accepted that the contract includes both a service contract that is valid during the continuation of the service relationship and non-competition agreement that stipulates obligations after the service contract is terminated.

Certainly,, employers shall not be able to impose penal conditions against employees under the conditions they want; they must comply with the following validity conditions of the prohibition of competition:

Ø  Firstly, it is necessary to meet the factual conditions. In this context, there must be an employment contract, the employee must be fully competent and there must be a possibility that the employee shall cause significant harm to the employer.

Ø  Non-competition agreement must be in writing.

In addition, the legislator has introduced some restrictions on the prohibition of competition in order to protect the rights of employees. It is stipulated that the non-competition agreement cannot contain inappropriate restrictions in terms of place, time and type of work, which would endanger the economic future of the employee unjustly.

2-   Unilateral Penal Clause Against the Employee Regarding the Confidentiality Obligation

The confidentiality obligation is regulated under the last paragraph of Article 396 of TCO, which regulates the duty of care and loyalty as follows: “The employee cannot use the information he/she learned whileworking, especially production and business secrets, to his/her own benefit or to others during the continuation of the service relationship. To the extent necessary for the protection of the employer's rightful interests, the employee is also obliged to keep a secret after the end of the service relationship.”

As it is understood from the article, the employee is obliged to keep the information he learned about the work he/she performed while the service relationship continues, and he/she is also obliged to keep  confidentiality to the extent necessary for the protection of the employer's rightful interests after the end of the service relationship. As a matter of fact, it may be stated that the employee's obligation to keep secrets after the end of the service relationship is legally separated from the non-compete commitment, and the provisions regarding these two concepts, which are different from each other, are regulated in different sections in accordance with the explained separation

In conclusion, a penal clause may be determined regarding the confidentiality obligation and this penal clause may be unilateral against the employee as one of the exceptions to Article 420 of TCO.

Regarding the matter, the 9th Civil Chamber of the Court of Cassation clarified this issue in its decision dated 28.01.2021 and numbered B. 2019/2639 and D. 2021/2697:

“Protecting information about the workplace and keeping it secret is within the scope of the employee's obligation of loyalty to the employer, and it cannot be considered that the penal clause for violating this is mutually regulated. It is obvious that the employee, who sent various documents to his personal account the day before resigning, violated the information protection rules that he had committed to comply with from the very beginning.”

However, it should be noted that sometimes the penal clauses imposed on employees may be regarded as unfair. In this way, exorbitant penal clauses are taken into consideration by the court, and the decision is made by reducing the penal clause in accordance with the last paragraph of Article 182 of TCO.

In conclusion;

Although the penal clauses against the employee regarding the prohibition of competition and the confidentiality obligation are allowed, it can be stated that they constitute exceptions to Article 420 of the Turkish Code of Obligations. As a result, the considerations that the unilateral nature of the unilateral penal clauses create nullity shall not be correct in terms of non-competition and confidentiality obligation. With this fact sheet, brief information has been given about the unilateral penal conditions frequently encountered in labor law.