It seems obvious that key principles of contract law could be considered by a Tribunal when evaluating the terms of an employment contract, though this seems to have been up for debate recently in Cleeve Link Ltd v Bryla.
Thankfully, the Employment Appeal Tribunal has clarified the position and provided helpful guidance on the scope of penalty clauses within employment contracts. A penalty clause is an attempt to deter or penalise a breach of contract by the imposition of a (usually) monetary penalty which is not a genuine pre-estimate of the likely loss arising from that breach. Such clauses are generally unenforceable. They are to be distinguished from liquidated damages clauses which also impose a financial cost on a party but without the trigger necessarily being a breach of contract and where the figure is a genuine pre-estimate of the loss or damage arising. These clauses are generally perfectly valid. Determination of whether a provision in an employment contract is a penalty or a liquidated damages clause is therefore pretty important.
The case concerned a Polish care worker who had been employed by Cleeve Link through an agency. Cleeve Link paid for Ms Bryla’s flight to the UK and for various training. To make sure it was not left out of pocket it put a clause in her contract stating that if she was dismissed or resigned within 6 months of starting then she would be required to repay those initial costs. Ms Bryla was dismissed for gross misconduct before she had worked 6 months and so was required to repay the sum set out in her contract, which in fact comprised the entirety of the wages owed to her. The Employment Tribunal found the repayment clause to be a penalty and therefore unenforceable, as it was not an accurate reflection of the actual loss suffered by Cleeve Link. Therefore Ms Bryla’s claim for the wages withheld was successful.
Cleeve Link said that the ET ought not to have concerned itself with whether the repayment clause was an unenforceable penalty clause. That was a matter for the High Court, it said. The EAT Judge waved away this suggestion, saying that consideration of employment contracts in light of contract law principles is a key function of the Tribunal.
You have to applaud the EAT Judge for his generous consideration of Ms Bryla’s case - “she showed me her work schedule, which appeared to show that she had [worked] 730 hours over a 28 day period. I cannot of course know the extent to which any of her remarks about the work is correct.” His respect for the apparent submission that Ms Bryla managed to find 26 hours in a day for 4 weeks and sleep for none of them may be slightly over the top. However, despite this sympathetic approach he found that the Tribunal had erred in its judgment for the following reasons:
- It had construed the contract at the time of the breach, rather than at the time it was entered into;
- The penalty clause argument should be assessed objectively; a ‘genuine’ pre-estimate of loss does not call for the undisputed honesty or genuineness of the parties who made the pre-estimate; and
- Considering whether the clause was intended to serve as a deterrent (hence a penalty) involves a comparison of the amount stipulated in the repayment clause and the amount which the claimant could reasonably expect to recover in a common law claim for damages.
Therefore, the repayment clause was enforceable after all. The Judge helpfully stated that in considering what is a genuine pre-estimate of loss, the employer should be given a rather wide latitude in its estimations and only where the stated sum can be consideredunconscionably or extravagantly beyond the amount which it would have reasonably been able to recover in a claim for damages, will the Tribunal interfere with the drafting of the contract. Beware the sting in the tail of making deductions to recoup a potentially unenforceable debt, however. Section 25(4) Employment Rights Act 1996 makes irrecoverable any debt for which an unlawful deduction from wages has been made.
As a result the Tribunal’s original finding was reversed and Ms Bryla was awarded nothing. Penalty clauses are evidently a matter of concern in commercial contracts and so they ought to be in employment contracts also. Nonetheless, it is clear that employers need not concern themselves too greatly with the precision of their calculations in such circumstances and will be permitted a generous margin for error. Some background jottings by the employer as to the thought-processes behind the sum claimed will almost always reinforce the chances of the clause being deemed valid.