Deduction in wages for failure to serve notice period

The Employment Appeal Tribunal (EAT) has upheld a Tribunal decision that a clause entitling an employer to deduct a month’s salary if an employee fails to work their notice period was not a penalty, despite the employee not receiving their notice pay.

In Yizhen Li v First Marine Solutions and another Miss Li was employed by First Marine Solutions Ltd (FMS) as a principal engineer. She resigned on 18 July 2012 following a dispute with her employer and claimed that she had enough holiday entitlement left to stay away from work for her one month notice period. FMS argued that she had already used up all holiday entitlement and would be required to work her notice period. Miss Li refused to do this believing that she had outstanding holiday entitlement.

FMS sent a letter to Miss Li on the day following her resignation stating that she was due £3,000 salary for the period to 18 July and £2,835.62 in expenses. FMS made a deduction from this of one month’s salary (£5,000) for the shortfall in the notice period. In doing so FMS relied upon clause 12 of Miss Li’s employment contract which stated:

“Either the Company or the Employee may terminate the Employee’s employment hereunder by notice in writing of not less than [one month] which may be from time to time adjusted… 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 Tribunal in looking at this case had to decide whether the clause allowing for the deduction of one month’s salary on the basis that the employee does not work their notice period was a penalty clause. The Tribunal felt that £5,000 was a genuine pre-estimate of loss and not an “extravagant and unconscionable” sum. Accordingly, it was held that clause 12 was not a penalty clause and was enforceable.

Miss Li appealed the decision to the EAT. However the EAT upheld the decision.

In obiter comments, Underhill J voiced concern that he did not want this case to set an unfortunate precedent. He set out observations for Tribunals dealing with similar cases in future as follows:

  • An employment contract should be construed with the circumstances in mind. A Tribunal should consider whether the parties really intended that, if an employee left without working their full notice period, they should pay to the employer a sum equal to the pay due for the remainder of the period of notice.  Normally the case would be that if an employee left work early and did not work their notice, they simply would not be paid for their notice, not that a further deduction would be made.
  • An employer may only make a deduction from sums due to it from an employee if there is an express provision permitting it in the contract of employment.

Underhill J was at pains to point out that this case is not authority for employers generally to recover sums equivalent to notice pay. This case was fact specific in that Miss Li was in a senior role  that required an immediate replacement, hence the loss that the employer suffered in having to replace her at short notice when she did not work her notice period.

If you currently have a deduction of wages clause in your staff employment contracts and would like us to review them, please contact a member of the Employment Team.

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