Employers may wish to revisit the wording of deduction from wages clauses as a result of two recent cases. Both cases suggest that, in certain situations, courts are more willing to accept the validity of repayment clauses than had previously been envisaged.
The basic principle is that, provided a repayment clause involves a ‘genuine pre-estimate of loss’, it should be enforceable. Problems arise however if a court considers that it is a penalty, designed to act as a disincentive to leave, and therefore unenforceable. As a result most employers are cautious in determining what sums they recoup from departing employees.
In Yizhen Li v First Marine Solutions, the EAT has ruled that an employer acted lawfully when it deducted a sum equivalent to the notice period after the claimant resigned with immediate effect. The employment contract contained a clause explaining “if an employee leaves, without working the appropriate notice, the company will deduct a sum equal in value to the salary payable for the shortfall in the period of notice.” The tribunal had rejected Ms Li’s claim for constructive dismissal and the issue before the EAT therefore related solely to the company’s actions in deducting £5,000 from her final salary payment, under the above clause. Was this a penalty and therefore unenforceable, or was it a genuine pre-estimate of loss? The EAT found it was enforceable, assessing this by what the parties anticipated when they entered into the contract, and not upon termination.
A word of caution regarding this decision, which at first glance seems very useful to employers. The President of the EAT was at pains to point out that this is not authority for employers generally to recover sums equivalent to notice pay. All penalty clause cases are very fact specific. It was critical to the decision here that Ms Li was in a senior role (receiving a high salary) that required an immediate replacement, for which considerable expense had been incurred after engaging a consultant through an agency. The recovery of lost notice monies is not the sort of clause that can be added across the board to standard contracts. However, if a person is in a position of responsibility with known issues around replacement, then employers might consider including this clause with additional modifications to enhance its chances of withstanding legal challenge.
A similar challenge was also made in the case of Cleeve Link Ltd v Bryla concerning recruitment and travel costs. In Bryla, the claimant was a Polish live-in care worker who had come to Britain through an agency. The employer paid for her flights and initial training costs. Ms Bryla signed a contract which said that if she was dismissed or resigned within 6 months she would be required to repay these costs (and thereafter on a sliding scale). She was summarily dismissed within the first 6 months, and her employers invoked the repayment clause, leaving her with no wages. She argued that it was a penalty clause. The EAT said it was not, explaining that a tribunal must “consider whether, at the time the contract was entered into, the predominant function of the relevant provision was to deter a breach of contract or to compensate the innocent party for a breach.”
Two other points emerged which are helpful in considering the scope of such clauses:
- Clauses should be construed on an objective basis: the issue of genuineness and honesty is not relevant, which is helpful by providing some latitude to employers faced with the difficult task of estimating loss; and
- A tribunal should consider the difference between the losses the employer could recover in an action for breach of contract and the amount in the repayment clause. If there is a significant gulf between them then this would amount to a penalty clause.