Freedom of contract can be restricted by mandatory legal provisions, and such restrictions are common in the case of employment contracts, since the majority of employment law provisions aim to protect the employee. Thus, such mandatory provisions cannot be altered by way of a contract between the employer and the employee.

Under Turkish Labor Law, the term of employment contracts are considered to be indefinite unless the contract is specified as being fixed-term by the parties, subject to existence/fulfilment of the conditions sought for admissibility of a fixed-term employment relationship. As per Article 11 of the Labor Law No. 4857, which is a mandatory provision, a fixed-term employment contract is admissible only if the employment is for (i) completion of a certain work/project (i.e., there is such work that will no longer continue once finished; for example, building a machine or installing a computer software, etc.), (ii) materialization of a certain event {i.e., cases where employment might be needed due to exceptional circumstances; for example, an employee taking maternity leave, sick leave, or any other reason), or if (iii) the work itself is fixed-termed (i.e., cases where the required work emanates from a particular matter or event; for example, an organization, a conference, or sports event).

Fixed-term employment contracts that do not meet these conditions or those that no longer meet the conditions despite having satisfied them in the past, are deemed as indefinite- termed employment contracts ab initio. To wit all the terms of the agreement remains the same, except the agreement is not considered to be fixed-termed but indefinite-termed.

There is one aspect of fixed-term employment contracts that crates a divergence of opinions when that contract is considered as indefinite- termed with the reason indicated above, which is the penalty clause. Fixed-term employment contracts usually include a penalty clause for both parties, stipulating payment of a penalty in case the contract {i.e., employment) is terminated by one party without just cause, before the expiry of the fixed term. In principle, a penalty clause is an ancillary obligation, the validity of which, depends on the validity of the contract in which it is stipulated. In that sense, if a fixed-term employment contract turns into an indefinite term employment contract due to failing to satisfy the conditions sought for fixed-term employment, one argument would be that then the penalty clause stipulated in regard to the fixed term would also be invalid.

There was, however, a divergence of opinions in the Turkish court practice in cases where a fixed-term employment contract was accepted and treated as an employment contract with an indefinite term, due to failing to satisfy the required conditions for a fixed- term contract, and a dispute has arisen that concerns the issue of whether the penalty clause (related to early terminations without just cause) stipulated in a fixed-term employment contract would still be valid and enforceable. Certain Civil Chambers of the High Court of Appeals have held the view that the term-related penalty clause must be given effect in such cases, while some others have concluded that the penalty clause cannot be deemed valid; hence, the resulting ambiguity in case law regarding this issue and the reason that the Civil General Assembly of the High Court of Appeals has taken the case in question to bring much-needed clarity to this issue.

The binding decision of the Civil General Assembly of the High Court of Appeals ("General Assembly"), numbered 2017/10 E., 2019/1K. and dated March 8,2019, unified the case law of the Turkish courts and determined that the penalty clause attached to unjustified termination before the expiration of the fixed term of the employment contract is valid, regardless of the fixed-term employment contract turning into an indefinite-term employment contract due to failing to satisfy the conditions required for a fixed-term contract. In effect, the General Assembly upheld the principles of freedom of contract, as opposed to the restrictions brought by the mandatory provisions of labor law.

Indeed, the General Assembly concluded that a fixed-term employment contract turns into an indefinite-term employment contract if it fails to satisfy the legally required conditions, which, in principle, emanates from the purpose of protecting employees, as the rights of employees working under fixed-term contracts are fairly limited compared to those working under indefinite-term contracts. The General Assembly also added that a term-related penalty does not violate this purpose, as long as the penalty clause is applicable to both parties, and not just to the employee.

Consequently, the General Assembly ruled that the principle of freedom of contract must be observed in terms of validity of the penalty clause, even if the fixed-term contract itself might be deemed as an indefinite-term contract due to failing to satisfy the required conditions for a fixed-term contract.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in December 2019. A link to the full Legal Insight Quarterly may be found here

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