Are employers restricted when applying penalties on employees for termination?

When seeking employment, employees are normally presented with a contract that includes terms and conditions governing the termination of their employment relationship. In Malta, employment law is regulated by the Employment and Industrial Relations Act (the “Act”), which distinguishes between indefinite and definite contracts. 

While definite contracts establish a specific term of employment, indefinite contracts remain binding until the employment is terminated by the employer or the employee. In both cases, the Act establishes a default probation period of six months or, alternatively, of one year in cases where employees hold a technical, executive, administrative, or managerial post and where their wages are at least double the minimum wage established in that year unless the parties agree on a shorter probation period. 

Following the probation period of a definite contract, both parties may terminate the employment before the expiration of the time established in that contract by paying one-half of the full wages that would have accrued to the employee in respect of the remaining time period agreed upon.

In respect of indefinite contracts, the employee may terminate the employment by giving notice in the manner set out in the employment agreement or the Act, without the need to assign any reason. On the other hand, the employer may only terminate on grounds of redundancy unless there is good and sufficient cause for dismissal. 

Worthy of note, in this regard, is the provision in the Act that prohibits employers from imposing conditions for termination which are less favorable to the employee than those specified in the Act. In such an instance, the contractual term would be automatically substituted by the default statutory provision outlined above. 

This prohibition is particularly important in those instances where employers seek to impose penalties by way of damages on the employee for terminating an employment contract. Such a condition could be deemed to be less favorable than the conditions established in the Act.  

In a recent judgment, the Court of Appeal considered the foregoing prohibition and stated that penalties in excess of what is stipulated in the Act for early termination cannot be enforced unless the employment contract has been approved by the Director of Employment and Industrial Affairs.  Referring to the Act, the Court also stated that the approval of the Director of Employment and Industrial Affairs can only be granted in exceptional cases and only if such a condition is a temporary measure intended to avoid redundancies.

In another instance where the Court of Appeal had to consider excessive penalty clauses for termination of employment, the Court appeared willing to enforce such penalty, however, only to the extent that such penalties related to the protection of the employer from the competition by the employee and not for mere termination. 

In conclusion, therefore, it appears that our Courts are unwilling to enforce penalty clauses related to the termination of employment that exceed the limits imposed by the Act. However, in limited instances where a penalty for termination is tied to the protection of trade secrets, confidential information, existing customers, or the prohibition of working for competitors and enticing existing employees, existing jurisprudence indicates a reluctance by our Courts to limit such penalty provisions.