Pay deduction for failure to work notice period was enforceable

14 July 2014

In Yizhen Li v First Marine Solutions, the EAT considered whether a clause in an employment contract allowing the employer to deduct a month's salary for an employee's failure to work their notice period could be enforced. The fact that the clause was written into the contract was not enough. Any such deduction could only be allowed if it was a genuine pre-estimate of the expense that the employer would incur as a result (‘liquidated damages’). Otherwise it would be a ‘penalty’ clause, unenforceable in law.

The claimant had 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 withhold her pay for the period not worked but also deduct from any sum outstanding a sum equal in value to that shortfall.

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.

The EAT upheld the tribunal decision, but made it clear that each case would depend upon its facts and gave some guidance to tribunals as to how to deal with such cases.

Points to note:

  • The EAT says that 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'.

  • In each case, employment tribunals should carefully consider whether the relevant clause was a ‘penalty’ clause, a ‘liquidated damages’ clause or simply a clause entitling the employer to withhold pay. It follows that employers must take great care over the drafting of termination clauses, particularly in the contracts of key employees