No penalty when an employer deducts salary for notice not worked

Li v First Marine Solutions Ltd [EAT] | 2014

Miss L was a project engineer for First Marine. Mr Moutrey, who set up First Marine, headhunted Miss L. They agreed a contract of employment, which included a clause:

‘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.’

Miss L had principal responsibility for a significant customer contract. There was a dispute between Miss L and Mr Moutrey. Miss L resigned and gave four weeks’ notice. She did not work her notice period. She claimed she was entitled to resign following the dispute and also that she had holiday to take. First Marine did not agree.

They wrote to Miss L the day after her resignation saying she had overtaken her holiday entitlement, Miss L would be paid to the date of resignation and her expenses, but they would deduct £5,000, being the sum equivalent to salary during the notice period she was not working.

Miss L, one week later, said that she would work the rest of her notice period. By this time First Marine had engaged a consultant to cover Miss L’s work.

As a matter of fact the employment tribunal found that Miss L had not been entitled to resign following the dispute and that First Marine had asked Miss L to work her notice period but she refused. She also did not have holiday to take. They therefore decided that First Marine was entitled under the contract of employment to deduct £5,000.

Miss L challenged the deduction on the basis that it was a ‘penalty’ or deterrent against her leaving without giving appropriate notice.

The EAT considered that Miss L was a highly paid employee, a project engineer in relatively short supply who could not be replaced at short notice without difficulty and significant expense and that she had been headhunted. It also considered that the amount deducted reduced according to the balance of notice unexpired and it was not excessive. The EAT upheld the decision that the clause was enforceable and not a penalty.

The EAT was hesitant. It did not want to set a precedent for other cases. It noted that the parties had not considered that the clause was a simple mechanism giving the employer the right not to pay an employee who does not work for all or part of their notice period. Instead they had jumped to whether or not it was a penalty.

In our experience clauses providing for payment of a fixed or easily calculable sum by an employee to their employer on termination are relatively few and far between. However, this case highlights that a balance needs to be struck if the clause is to be enforceable.