Notice Pay and Penalty Clauses

Notice Pay and Penalty Clauses

Can an employer deduct a month’s salary from an employee’s wages for their failure to work during their notice period?

This is the question that has been considered recently by the Employment Appeals Tribunal (EAT) in the case of Li v First Marine Solutions.

The Claimant had resigned and did not work during her notice period as she believed that she had outstanding holiday available. The parties agreed that the effect of the Claimant’s employment contract was that the employer could not only withhold her pay during the notice period if she did not work but they could also deduct a sum equal to the value of the shortfall from any outstanding amount.

The Claimant argued that this was not enforceable as it was a penalty clause.

The Employment Tribunal disagreed and held that the clause was enforceable. This was justified because the Claimant did not work her period of notice even though she did not in fact have any holiday remaining and it was difficult and expensive to recruit a replacement at short notice.

This decision was upheld by the EAT although they did express concerns that the parties had agreed on the effect of the clause. The EAT then made a number of observations regarding this type of clause.

The Employment Tribunal should carefully consider the reality of employment circumstances and whether this effect was truly intended by the parties. Otherwise the normal principle would be “no work no pay” without the additional deduction.

The Employment Tribunal should also consider whether the clause was actually a penalty clause as opposed to a liquidated damages clause or just a clause entitling the employer to withhold pay.

Employees should be careful when resigning from their employment and make sure that if they do not work their notice period they are not in breach of their contracts. If employers and employees are able to agree on the effect of a clause similar to that detailed above it is less likely that the Tribunal would consider it to be unenforceable as no one party would be seen in a stronger negotiating position than the other.

If you have resigned from your employment or been dismissed for any reason and you employer has refused to pay all or part of the remaining owed to you please contact the dedicated employment team at Michael Lewin Solicitors and we will be happy to discuss this with you.

Anthony Fox

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