Penalty for an employee failing to work their notice

It is frustrating for employers when an employee leaves work without giving or working their contractual notice period. After all, the notice period is there to give the employer an opportunity to find and interview a suitable replacement.

An employee who leaves without giving proper notice is in breach of contract but there is little point in taking action against them because the employer must prove it suffered “damages” (losses) as a result. Employees can argue that because the employer did not have to pay salary/benefits during the notice period, they suffered no loss and were, in fact, better off.  Unless the employee was a key individual engaged on a project and the employer can show it lost money as a result of their early departure, there is little chance of the employer successfully suing them.

Because of this difficulty, employers sometimes put a clause in the employment contract stating that a sum of money can be deducted from the employee’s salary if they leave without giving the required contractual notice. But such a clause can be risky because case law says that where a contractual clause provides for the payment of a pre-determined sum upon breach of contract, that sum must be a genuine pre-estimate of the employer’s losses. If it is not, the clause may be considered to be a “penalty” and unenforceable because provision is intended to be punitive rather than compensatory.

The good news for employers is that in a recent case the Employment Appeal Tribunal (EAT) decided that such a clause was not a penalty clause and was enforceable.

The employee’s contract provided that she was obliged to give notice in writing of not less than one month and stated “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 employee resigned on 18 July 2012 and claimed that she had sufficient holiday to stay away from work for the one month’s notice. The company said she did not have that amount of untaken holiday and required her to work her notice period – she refused. She was paid her salary of £3,000 up to 18 July, from which the employer deducted one month’s salary in accordance with the clause above.

On 25 July the employee changed her mind and said she was now prepared to work her notice. As as the company had already engaged a consultant to replace her it responded by saying it was too late.

When the employee brought a claim in the Tribunal it found in favour of the employer and said that the amount deducted was a genuine pre-estimate of loss and not an “extravagant and unconscionable sum”.

The employee appealed to the EAT who said that it was up to her to show that the clause was a penalty and not a genuine pre-estimate of loss and she had failed to establish this. The EAT said that the longer an employee worked during their notice, the more the deduction would be reduced and the additional cost incurred in replacing the employee could diminish as the amount of notice increased. Therefore the clause was a genuine pre-estimate of loss.

The EAT added that the assessment of whether the clause was a genuine pre-estimate of loss should be made at the time the parties entered into the contract rather than in the light of any actual loss.

Whilst this is a welcome judgment for employers, it is unlikely to have widespread application because the EAT stated that it did not intend to create an unfortunate precedent. However, employers that insert such a clause into its contracts will introduce a deterrent to employees leaving early and, in some circumstances, that clause will be enforceable.

Reggie Lloyd
01206 217347
reggie.lloyd@birkettlong.co.uk