It can be really frustrating for an employer when an employee just ups and leaves without giving the contractual notice period. Many employment agreements contain a provision to the effect that if an employee fails to give the correct period of notice, the employer can deduct a sum equivalent to the salary for the unworked period from the employee’s final pay.
However, there are two cautionary notes here:
- Changes to the Wages Protection Act 1983 (WPA) mean that employers cannot make deductions without consulting with the employee first; and
- An Employment Court case suggests that deducting salary for unworked notice may amount to a penalty in some circumstances, and be unjustifiable.
Wages Protection Act 1983
Amendments to the WPA came into force on 1 April 2016. The Amendment confirms that “an employer may, for a lawful purpose, make deductions from wages payable to a worker – (a) with the written consent of the worker (including consent in a general deductions clause in the worker’s employment agreement); or (b) on the written request of the worker”.
So the good news for employers is that the general consent to deductions that most employers have in the employment agreement will be effective. This clears up any confusion caused by a couple of contradictory cases in the past.
However, from 1 April, employers “must not make a specific deduction in accordance with a general deductions clause in a worker’s employment agreement without first consulting the worker”. In other words, before making a deduction in reliance on the general clause in the employment agreement, employers need to explain the deduction it is proposing to make, seek the employee’s feedback, consider it, and then make a decision. Note that the amendments require consultation about the specific deduction – as opposed to fresh agreement. So an employee may provide feedback to the effect that they do not want the deduction to be made. So long as the employer genuinely considers the employee’s view, and so long as the general deductions clause is present in the employee’s agreement, and the employee has signed the employment agreement, the employer still decide to make the deduction.
Deduction of unworked notice
If an employee leaves without giving the required period of notice an employer does not have to pay an employee for the unworked period. When it comes to deducting from an employee’s wages for unworked notice, it is a little less clear-cut.
An Employment Court decision from last year (G L Freeman Holdings Limited v Diane Livingston) considered whether a clause purporting to allow for the deduction of salary equivalent to unworked notice was enforceable.
In that case, the employee gave two weeks’ notice when her employment agreement provided for six. The employer relied on a clause that said “in the event that the employee fails to give the required notice then equivalent wages shall be forfeited and deducted from any final pay including holiday pay” to deduct the equivalent of about three weeks’ wages (which amounted to her whole final pay entitlement).
The Court had to consider whether the clause was a liquidated damages clause; that is a genuine pre-estimate of the damage that is likely to be suffered if the contract is breached or a penalty for breaching the contract. A liquidated damages clause is legitimate and enforceable, but a penalty is not.
The Employment Court found that the employer hadn’t actually suffered any financial loss by the employee’s failure to give the correct period of notice. The employer then said it was to compensate the employer for the stress and hassle of the situation. The Court found that the employer (a company) couldn’t, as a matter of law, be stressed – only people can. Therefore the Court found that the purpose of the clause was to compel the employee to give the correct notice period by holding over her the threat of losing wages if she did not comply. As such, it was a penalty provision, and the Court would not enforce it. The employer was required to reverse the deduction.
The Court did however find that the employee had breached her employment agreement, and was liable to a penalty. The Court found that an appropriate penalty was $500, and that it should be paid to the Crown, not to the employer.
So the question is whether the employer will suffer any loss as a result of the breach. To work as a liquidated damages clause, this needs to be assessed at the time of entering into the employment agreement. If there is a particular reason why a particular employee leaving without giving the agreed period of notice will cause a monetary loss for the employer, then it will be legitimate to include the clause in the employment agreement. If not, the employer will be taking a risk by making such a deduction at the end of employment.
In our view, the risk would be less if the employer could at least point to a loss due to the employee’s breach at the time the deduction is made. For example, if the employer makes a deduction equivalent to the increased cost of hiring a temp, due to the employee’s failure to give notice. However, if there is no demonstrable financial loss, the employer runs the risk that the deduction will not be lawful.
Ideally, the employer and employee would consider the importance of giving notice at the time the employment agreement is signed. If notice is particularly important for any reason, this would be the time to make an estimate of how much it might cost if the employee didn’t give the correct notice. Realistically, we suggest that this would be asking for quite a lot of crystal-ball gazing for employer and employee. Perhaps a middle-ground would be that employers seeking to rely on such a clause when an employee resigns should consider whether any financial loss has actually been suffered, and deduct only that amount.
What you need to do:
- If relying on a general consent to deductions clause in an employment agreement the employer needs to consult with an employee before making any deductions from his or her wages, including final pay and holiday pay.
- If the period of notice is critically important to the employer, consider making a realistic assessment of likely damage at the time you enter into the employment agreement and record it in the agreement.
- For a ‘middle ground’ approach – an employer should only make a deduction for unworked notice if it has actually suffered financial loss.
If you have any questions about deductions or want to run a particular scenario by us, please do not hesitate to contact us.