In Li v First Marine Solutions and another, the Employment Appeal Tribunal (EAT) ruled that a clause in an employment contract entitling an employer to deduct a sum equivalent to the notice period if an employee did not work their notice period was enforceable.
Ms Li was employed as a project engineer of First Marine Solutions Ltd. When she resigned, she refused to work her notice period because she believed she had outstanding holiday. First Marine disagreed and informed her that it would deduct one month’s notice period from her final salary, as provided by this clause in her employment contract:
“If an Employee leaves, without working the appropriate [one month] notice, the company will deduct a sum equal in value to the salary payable for the shortfall in the period of notice.”
One week after Ms Li resigned, she confirmed that she was prepared to work the remainder of her notice period. However, First Marine had already engaged a consultant to replace Ms Li so it did not allow her to do so.
Both parties agreed that the effect of the clause was that it provided a right to the employer to have a sum equal to the salary payable deducted from whatever might be due to an employee who had not worked their notice period. The question was whether such a clause was enforceable. Ms Li claimed that the clause operated as a penalty by punishing her for leaving employment and it was therefore intended to dissuade her from doing so. First Marine argued that it was a genuine pre-estimate of the loss which could be expected to follow from a breach of contract.
The EAT upheld the Tribunal’s decision that the clause was not a penalty and was therefore enforceable.
The EAT considered that Ms Li had failed to establish (as the party seeking to escape liability) that the clause was a penalty. The case was distinguished from Giraud UK Ltd v Smith, in which a similarly worded clause was held to be a penalty. The main difference was that in Giraud, the employee was a driver, whereas Ms Li was a highly skilled project engineer. It was easier to find a driver at short notice, but finding a replacement for a project engineer was likely to be more difficult, time consuming and costly.
While at first glance this case appears to be good news for employers, the EAT was careful to warn that this case should not be used as authority to generally deduct sums equivalent to notice pay. Employment contracts are individual and each case should be determined on the facts involved.
The EAT also expressed concern at how the clause was approached by the parties. It was possible that the clause was simply a provision entitling the employer to withhold pay for the period of time not worked during notice. This argument was not put forward by either party so the EAT did not fully consider it, but it recommended that Tribunals should consider such clauses carefully, having regard to all the evidence before them in a particular case.