19 April 2018
It is not unheard of that an employee may want to wrap up their employment early and move on to another job as quickly as possible essentially ignoring their notice requirements. It is also common to find a clause in a written agreement which requires the employee to not just provide the specified notice of termination but also face loss of wages if they fail to give proper notice equal to the amount they would have received if they had stayed on as expected. While the purpose of such a clause may reasonably be said to ensure some level of continuity if not certainty for a business during a period of change brought on by the employee’s departure, the little known 2015 decision of the Employment Court in G L Freeman Holdings Limited v Livingston has found such a clause may not be enforceable.
Ms Livingston was a receptionist at a hotel in Christchurch and the circumstances included a written employment agreement which provided either party could terminate the relationship on six weeks’ notice. While the clause enabled her employer to pay notice the clause also said that should Ms Livingston depart without giving notice then “equivalent wages shall be forfeited and deducted from any final pay including holiday pay.”
As it occurred Ms Livingston became unhappy in her job, she located another position and gave two weeks’ notice instead of the six weeks’ she had agreed to give when signing her employment agreement. In her letter of resignation Ms Livingston explained she was moving on and “eager to accept this new challenge”. She clearly understood the short notice was breach of the agreement.
About a week after she left work her employer wrote to her to say that she was not going to receive her final pay of $1,943.50 because she had given two weeks’ notice instead of the six required. Ms Livingston raised a personal grievance in the Employment Relations Authority. The Authority said the clause in the written employment agreement her employer relied on was not a bona fide reflection of actual loss and instead amounted to a penalty to compel performance and was unenforceable. While the employer was directed to pay the money, the Authority also said Ms Livingston should pay a penalty of $500 payable to her employer for knowingly breaching her agreement. The employer challenged the outcome in the Employment Court.
The Employment Court thought several matters needed to be cleared up, including whether or not the forfeiture clause was enforceable and what if any penalty should Ms Livingston pay? Interestingly in reaching their decision the Court considered a 1915 English tyre case and found that while a person who breaches a contract could be penalised for committing the breach the amount paid should not be so lopsided as to be unfair. The Employment Court said the $1,943.50 deduction was unfair in these circumstances and in doing so did not accept the employer’s argument that Ms Livingston’s early departure placed stress on the business. In the end the Court said:
“the purpose of the forfeiture clause was to compel Ms Livingston to give six weeks’ notice by holding over her the threat of losing wages if she did not comply. As such, it was a penalty provision which, in equity and good conscience, the Court ought not to allow the plaintiff to enforce.”
Section 134(1) of the Employment Relations Act 2000 provides a party who breaches an employment agreement is liable to a penalty. The Court also said there was “no doubt” Ms Livingston knew she was breaching the agreed term of her employment agreement by only giving two weeks’ notice instead of the six weeks required. Accordingly it imposed a $500.00 penalty on her to be paid to the Crown.
The upshot is a clause of the type found in Ms Livingston’s agreement may involve consideration of the circumstances involved and may not be safely relied on even though the employee’s failure to give notice is deliberate. As observed by the Authority a better approach to a blanket provision seeking to withhold wages may be to front foot it and make a reasonable and genuine assessment of potential loss when entering into an agreement. What may be used to support a projection of loss will depend on the particular circumstances, and at any rate will not include costs usually incurred when recruiting staff.
If this item has been of interest or concern to a member we invite you to consult with us and we can develop a suitable clause for use.
David Browne | Solicitor
Diana Hudson | Managing Solicitor | 03 456 1804 | 021 816 469 | email@example.com
David Browne | Solicitor | 03 456 1812 | 021 225 6938 | firstname.lastname@example.org
Angela MacKenzie | Solicitor | 03 218 7962 | 021 756 809 | email@example.com
Grant Walker | Advocate | 03 455 5165 | firstname.lastname@example.org