Turkish appeals court rules fixed-term penalties apply even in open-ended agreements

Turkiye

In a landmark decision on 8 March 2019, the Turkish Court of Appeals ruled that penalty clauses under a definite or fixed-term employment agreement will be valid for the agreement's duration even if the agreement is deemed open-ended.

The Turkish appeals court handed down the landmark ruling on 8 March 2019. According to the decision, penalty clauses under a definite-term employment agreement will be valid for the duration of the agreement. This is the case even if it is deemed an indefinite-term or open-ended employment agreement because of the absence of certain mandatory conditions as addressed under Turkish Labor Law that are applicable to the due execution of definite-term employment agreements.

Turkish Labor Law includes various instruments that are aimed at protecting employees, such as an employee's right to seek re-instatement in the case of unjust termination.

This re-instatement right is available to employees working under indefinite-term agreements. An employee who has entered into a definite-term agreement, however, would not be able to seek re-instatement. On the other hand, a definite-term agreement may contain a protection such as a penalty clause against the termination of the agreement prior to the expiration of the definite term.

To support workers, Turkish Labor Law allows definite-term employment agreements in only exceptional circumstances, namely where an objective condition exists such as the completion of a specific work assignment. Where an objective condition does not exist, the definite-term employment agreement is considered indefinite-term employment as of its effective date.

This approach has resulted in conflicting decisions from various Civil Chambers of the Court of Appeals. Conflicts have arisen especially about the validity of penalty clauses under definite-term employment agreements in cases where they are deemed to be indefinite-term agreements.

Specifically, while certain appeals courts ruled that if a definite-term agreement is deemed to be of an indefinite term, the penalty clause is unenforceable since the penalty was aimed at avoiding an early termination of a definite-term agreement. On the other hand, some experts have argued that this re-qualification should not affect the validity of the penalty clause.

Based on the appeal court’s recent decision, penalty clauses under a definite-period employment agreement will be valid even if such an agreement is deemed to be an indefinite-period agreement. However, the effective period of such clauses will still be limited to the time period initially agreed upon by the employer and employee.

For further details on this court decision and its implications for doing business in Turkey, contact your regular CMS source or local CMS experts Done Yalcin and Sinan Abra.