30 October, 2009
CLA Tackles Abusive Penalty Clauses in Labor Contracts
The Taiwanese media reported earlier this month that the Council of Labor Affairs (CLA) was drafting amendments to the Labor Standards Act to prevent abuse of penalty clauses in labor contracts. The CLA says it has received many complaints of attempts to enforce unfair, abusive penalty clauses to which employees have agreed in order to find employment during the current economic downturn.
It should be noted that penalty clauses for breach of contract can and are enforced under Taiwanese law. Labor contracts are no exception. The CLA distinguishes between penalty clauses and what it terms "punitive penalty clauses", which are essentially liquidated damages. Punitive penalty clauses are most common in the aviation industry and are widely used in employment contracts with pilots. An example of a punitive penalty would be if an employer and employee agreed to fixed damages for early resignation at 30 months salary.
According to the CLA, penalty clauses first became common in Taiwan's technology industry. Typically, the employee agrees that if he or she resigns before having completed two to three years of employment, he or she will pay the employer a penalty equivalent to two or three months of salary. The penalty clause for early resignation is often accompanied by a non-compete clause where the employee agrees to pay the employer a penalty if he or she accepts employment with a competitor after resignation from the original employer within a certain period of time. The employee usually agrees to wait for six months or up to two years before accepting employment at a competitor.
During the recent recession, both ordinary penalty clauses and punitive penalty clauses have spread to other industries. The CLA is now proposing to prohibit all punitive penalty clauses. Nonetheless, the CLA argues that ordinary penalty clauses should still be enforceable on the public policy grounds that if an employer intensively trains an employee such that the employee's job skills are improved during the course of employment, the employee should repay the employer through service or in money. To protect employees, the CLA wants to create an exception to the enforceability of ordinary penalty clauses where acts of the employer caused the employee to terminate the employment relation. Under this exception, even an ordinary penalty clause will be void if the employer has violated the terms of the employment contract, labor laws, or failed to pay wages and the employee terminates the employment.
The CLA will now need to draft its proposed legislation and hold public hearings before submitting its draft to the Executive Yuan for approval, after which the Legislature will take up the bill.
For legal guidance on employment law in Taiwan, please contact Christine Chen.
