We analyze the role of damage clauses in labor contracts in which the worker may desire to work for another firm. We show that the initial contracting parties have an incentive to stipulate excessive damages in the contract which leads to ex post inefficiencies for some states of the world. We show that the frequently used rule of putting an upper bound on enforceable damages is welfare improving. Thereby, the crucial role of the worker's outside option is stressed. The result obtained are used to explain why binding long term contracts are frequently prohibited in labor law.