Penalty Clause in Employee's Notice Period

24 June 2014

The Employment Appeal Tribunal (EAT) has ruled on whether a clause deducting a month's salary for an employee's failure to work their notice period is a penalty clause.

We are grateful to Daniel Barnett for this summary of the decision in Li v First Marine Solutions.

The Claimant resigned and did not work her notice period because she said she had outstanding holiday. The parties agreed that the effect of the contract was that the employer could not only to withhold her pay for the period not worked but also deduct from any sum outstanding a sum equal in value to that shortfall. The Claimant argued that this was unenforceable as a penalty clause.

The employment tribunal held that the clause was enforceable. The Claimant had not worked her notice period (she did not have holiday remaining), and it was difficult and expensive to recruit a replacement at short notice.

In upholding that decision, reluctantly, the President of the EAT (Mr Justice Langstaff) expressed concerns that the parties had agreed the effect of the clause. He made a number of observations on clauses of this type (at paras.43 to 47).

Firstly, the employment tribunal should consider the 'reality of employment circumstances', and whether the effect was really intended. The normal principle is 'no work, no pay'.

Further, employment tribunals should carefully consider whether the clause was a penalty clause, a liquidated damages clause or simply a clause entitling the employer to withhold pay.