Can I terminate an employment contract without paying the compensation stipulated in the contract?

Last updated on May 2, 2011

Signed a contract but had a change of heart before even showing up for work? Circumstances prevent you from serving the full extent of your contract? Don’t panic yet.

Pursuant to Singapore’s laws, an innocent party can claim damages for a breaching party’s breach of contract. If you chose not to perform the contract, by refusing to serve the employment contract to its fullest extent, you are the breaching party. The innocent party can file a civil suit against you to claim for damages suffered as a result of you not performing.

Alternatively, a well-prepared contract would already have express provisions stipulating the sum of money to be paid by the contract-breaker in the event of a breach, known as “liquidated damages”. This principle applies in many scenarios where employment is direct between an employer and an employee, and also where employment is between a recruitment agency and an employee.

In most cases, you would have to pay the sum of money as compensation, stipulated in the relevant clause, if you chose not to perform the employment contract. However, exceptions do arise. If the sum of money is deemed to be a penalty clause, it would not be enforceable and a contract-breaker would not be required to pay such a sum. What is deemed a penalty clause varies from case to case and is highly dependent on the facts.

A compensation clause is likely to be a penalty clause if, it stipulates an excessive sum of money to be paid upon a breach of contract, disproportionate to the amount of loss actually suffered by the innocent party.

If you breached a direct employment contract with your employer, he would likely incur losses from your absence at work. If you breached an indirect employment contract with a recruitment agency, the agency would suffer losses, such as the loss of commission payable by the employer. In order to be enforceable, the compensation stipulated has to be a genuine estimate of actual loss suffered by the innocent party.

In the recent years, there have been many cases where courts have held compensation clauses unenforceable for their penal nature, allowing for employees to avoid coughing up extravagant sums of money. If you find yourself in such a situation, know that you are certainly not alone in this regard.

Do note that according to the Ministry of Manpower:

“Your contract may require you to pay a monetary compensation (in addition to notice pay) for terminating the contract before a specified period.

Such terms are not covered by the Employment Act and are based on the contract of service. Any disputes have to be settled by the civil court.”

If you suspect a term in your contract to be a penalty clause, do consult a lawyer for advice. Alternatively, you may visit a community legal clinic if you are unable to afford a lawyer.