What are ‘Google Penalties’?

Google tries to make sure that people using their search engine get only the most relevant results to them, and when they detect that a site is likely to not deliver value to the user but is trying to pass itself off as a site that will, and/or is trying to rank higher through the use of techniques violating the search engine’s terms of service, they take measures ranging from warnings to more drastic ones such as banning. A Google penalty is defined as a negative impact on a website's search rankings, usually caused by the use of black-hat techniques, but sometimes happening as a result of an algorithm update, and once in a while it is caused by factors out of the site owner’s control.  

Further Reading:

Google explains their spam fighting efforts here: http://www.google.com/intl/en_uk/insidesearch/howsearchworks/fighting-spam.html

This article goes in depth about each type of penalty: http://searchenginewatch.com/sew/how-to/2276498/pure-spam-what-are-google-penalties-what-to-do-to-recover