Termination clause: what is it and how does it work?

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If you are not immersed in the world of sports you may not know what we mean when we talk about a termination clause. The termination clause refers to the contractual working arrangements of professional athletes with the clubs that represent them. What you get from this provision is a pre-fixed sum of money that is assured to the club in the event of early termination of the employment contract between both parties.

In this post, we will tell you everything you need to know about termination clauses: what they are, what they are for, and how they work.

What is the termination clause?

As mentioned at the beginning, the termination clause assures the club a fixed indemnity in case the player is hired by another club to be represented. That sum of money has to be paid by the new club that wants to represent the player.

However, if you are wondering if this clause is used in all countries, the answer is no. The termination clause takes place in Spain, a country that in fact has the highest clauses in soccer worldwide. But it does not occur in countries such as Germany, France, England, or Italy. Precisely, the termination clause was born in Spain in 1985, and is regulated in Royal Decree 1006/1985, which is the rule that regulates the employment relationship of professional athletes. It should be noted that the clause applies not only to soccer but to any sport in which the professional player receives remuneration for being represented by a particular club.

What is the purpose of the termination clause?

The regulation of Royal Decree 1006/1985 requires that contracts last for a certain period of time, which allows the professional athlete to experience his career in different clubs so that he can improve his economic conditions as his performance progresses. In this sense, the termination clause differs greatly from the conventional labor contract, since the athlete cannot terminate the contract of his own free will, unlike an ordinary worker, but must wait for the contract to be terminated. In this sense, the clause precisely grants the player the possibility of leaving the club despite the fact that his contract is still in force.

How is the amount of compensation calculated?

Now that we have analyzed what the termination clause is, how it is legally framed and what it is used for, let’s see how it works and how the amount of the severance payment is calculated. The amount, previously agreed in the contract, is a tax-free figure, and is usually calculated based on the player’s remuneration and the number of years he has been with the club. This amount is not always made public. In addition, it is common for the amount to be provided for in contracts in different amounts depending on the time of termination, the category of the club, or also depending on the new club. It should also be noted that the labor courts can make use of their moderating function, and decrease the amount of the termination clause fixed in the contract.

You should also know that the decree in question establishes that in cases where no agreement is reached between the athlete and the club, the court determines the amount of compensation. The judge must analyze the circumstances of the fact, the damage caused to the club and other variables to set the amount.

How does the termination clause work?

The payment of the indemnity is made by the player through a deposit in the Liga de Fútbol Profesional. In other words, the athlete who unilaterally terminates the contract prior to its expiration pays the club in which he was participating. Then, the new club that represents the athlete within one year from the date of termination of the contract, will be subsidiarily liable for the payment of the clause. This means that the new club only pays in case of insolvency of the athlete, who is the person obliged to pay.

Once the money has been deposited, the athlete is free to join the new club. It should be noted that the clauses are usually so high. This generates that a third club interested in the player also joins to negotiate a price for him.

In the case that the contract is broken jointly by both clubs and the athlete. They can decide between the three parties the date of the end of the contract and the agreed transfer amount.

However, in the case where a club is interested in representing an athlete before the end of the contract with his current club, and the current club does not want to agree on a transfer fee, they will then negotiate it between the athlete and the new club. This involves tax interventions, as the amount is now considered as a salary, which means that it should be taxed. It is for this reason, that many termination clause payments end up as transfers at the same value of the termination clause to avoid tax issues.

Summary

As we have seen throughout this post, the termination clause is a way through which clubs try to prevent their best players from slipping away. That is to say, thanks to the termination clause, clubs ensure an economic retribution in the cases in which other bigger clubs want to capture their players.

Now you know everything you need to know about the termination clause. If you have any doubts or need advice, do not hesitate to contact us. We solve and manage your tax, labor, commercial and legal procedures as self-employed, small or medium-sized companies. At Blegal we are the only law firm that meets all your needs with commitment, dedication and energy.

 

Photo by Alejandro Escamilla on Unsplash

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