[co-authors: Beril Yayla Sapan, Asena Aytuğ Keser]*

Penalty clauses in fixed-term contracts are common in Turkey and apply if either party to such a contract ends the contract before the expiration of the fixed term. Turkey’s Supreme Court has held that penalty clauses continue to apply even if the contract should be interpreted as a permanent contract due to a lack of justification for a fixed term.

On March 8, 2019, the Supreme Court General Assembly on the Unification of Judgments concluded that penalty clauses for unjust terminations of fixed-term employment contracts before their expiration are valid and enforceable even if the contracts are determined to be of indefinite term from the beginning due to a lack of objective conditions required by law.

Fixed-term employment contracts are regulated under Article 11 of the Turkish Labor Act (TLA), and can be executed only where there are objective conditions set out in the TLA. These include cases involving the completion of a specific project or an employee’s temporary absence for military service or maternity leave. With a fixed-term employment contract, it is possible to determine a penalty clause in the case of the contract’s unjust termination before the expiration of the contract’s term, provided that the agreed clause is applicable to both employer and employee.

When a fixed-term employment contract lacks the requisite objective conditions, it is deemed to be a contract of indefinite term from the beginning.

Although penalty clauses are normally inapplicable to permanent contracts, parties may agree on a minimum period during which the contract cannot be terminated, backed up by a penalty clause should either party end the contract before that minimum term. The clause must be set out in writing.

The General Assembly’s judgment relates to the conversion of fixed-term employment contracts that include penalty clauses for unjust early termination into indefinite-term contracts by law due to the absence of objective conditions.

The General Assembly decision was based on the most basic principles of the Turkish Code of Obligations: freedom of will and contract. The General Assembly considered that the mutual will of the employer and employee was to provide job protection to the employee and assurance to the employer of the employee’s performance during the period specified in the contract. On this basis, the General Assembly opined that conversion of the fixed term contract into one of indefinite term does not thwart the parties’ concurrent wills and the penalty clause should continue to apply to what was effectively a minimum term.

Due to the binding nature of the decision, penalty clauses for unjust termination of fixed-term employment contracts before their expiration shall be valid and enforceable even if those contracts are deemed to be of indefinite term due to the lack of objective conditions required for fixed-term contracts.

*Gün + Partners