An employment contract may state the amount of liquidated damages to be paid if the contract is breached. Upon a party's breach, the other party will recover this amount of damages whether actual damages are more or less than the liquidated amount.
If the agreed-upon liquidated damage amount is unreasonable, the Court will hold the liquidated damage clause to be void as a penalty. If the Court declares the clause to be void, the employer would have to prove the actual damages.
In Massachusetts, a liquidated damage clause in an employment contract is a provision that outlines the compensation an employer can seek from an employee in the event of a breach of contract. This clause serves as a predetermined amount of damages agreed upon by both parties as a reasonable estimation of the employer's potential losses caused by the employee's breach. Here are some important points to consider: 1. Liquidated Damage Clause Definition: A liquidated damage clause establishes a fixed amount of damages that the breaching party (employee) agrees to pay to the non-breaching party (employer). It serves to mitigate uncertainties and provide clarity in case of a breach. 2. Purpose of a Liquidated Damage Clause: The primary aim of including a liquidated damage clause in an employment contract is to protect employers from the potential losses incurred due to an employee's breach. It allows both parties to agree on a specific sum, considering the difficulty of proving actual damages caused by the breach. 3. Enforceability Criteria in Massachusetts: Massachusetts holds liquidated damage clauses to a strict standard of reasonableness. To be enforceable, the predetermined amount must be a reasonable forecast of the actual damages that could arise from the breach. It should not function as a penalty to punish the employee. 4. Determining Reasonableness: Massachusetts courts consider various factors to determine the reasonableness of a liquidated damage clause. These factors may include the nature of the employee's role, the potential harm caused by breaching the contract, the difficulty of proving actual damages, and the proportionality of the liquidated damages to the anticipated harm. 5. Different Types of Liquidated Damage Clauses in Massachusetts: a. Flat-Sum Liquidated Damages: This type specifies a fixed monetary amount as compensation in case of a breach. For example, if an employee breaches the employment contract by leaving before the agreed-upon term, they may be liable to pay a fixed sum, such as $10,000, to the employer. b. Percentage-Based Liquidated Damages: In this type, the amount of damages is calculated based on a percentage of the employee's salary or some other financial metric. For instance, the clause might state that the employee shall pay 25% of their annual salary if they breach the contract. c. Graduated Liquidated Damages: This type involves a tiered structure where the damages increase depending on the duration or severity of the breach. For example, if an employee breaches the contract by soliciting clients within the first year of termination, they may be liable to pay $5,000 for the first violation, $10,000 for the second violation, and so on. It is vital for both employers and employees in Massachusetts to fully understand the terms and implications of a liquidated damage clause in an employment contract. Seeking legal advice before entering into such agreements can help ensure fairness and prevent potential disputes in the future.
