A contractual provision imposing a financial sanction on an employee for failure to give her full contractual notice was enforceable, according to a recent decision of the Employment Appeal Tribunal.

The EAT has upheld the employment tribunal’s decision that it was not an unenforceable penalty clause to make the employee liable to pay the employer a sum equivalent to the wages she would have earned during the unworked portion of her notice period. In this case that amounted to a full month’s pay, because she had failed to give any notice, working on the mistaken assumption that she had accrued sufficient annual leave to cover her contractual notice period of one month.

In cases like this, the key question is whether the amount to be deducted is a “genuine pre-estimate” of the loss the employer is likely to suffer if the employee fails to work the contractual notice period, rather than a sanction that is designed to deter any such breach. If it does not pass this test, it will be regarded as a penalty clause, and therefore unenforceable. The answer the court will give in the event of a dispute is not always predictable, as it will depend on the surrounding circumstances when the contract was entered into. In this case it appears the key factor was that the employee was highly skilled and it would therefore be expensive to recruit a replacement. That made using a clause like this look more reasonable than if she had been a relatively junior worker who could be easily replaced.

Despite the outcome of this case, employers should not rush to include such clauses in their standard contracts of employment. It may however be possible to consider them in the contracts of more senior employees with scarce skills. But if doing so, it is important to get the drafting absolutely clear, because any ambiguity is likely to be resolved in the employee’s favour. In some instances there can be confusion between a clause that merely confirms that the employee will not be paid for any unworked portion of the notice period and one that actually imposes a liability to compensate the employer for failure to work the full period. Ironically, it was arguable that the clause in this case had the former meaning, but both parties had agreed in the tribunal that the second alternative was the correct interpretation.