Penalty clauses in employment contracts

Payment of workers would normally be governed by an employment contract, if they are employed; or by a Consultancy Agreement if they are self employed. If, which is not entirely unusual, there is no written record then an Employee will seek to rely on an oral agreement confirmed by conduct. As a last resort, a

Home » Employment law » Penalty clauses in employment contracts

Payment of workers would normally be governed by an employment contract, if they are employed; or by a Consultancy Agreement if they are self employed. If, which is not entirely unusual, there is no written record then an Employee will seek to rely on an oral agreement confirmed by conduct. As a last resort, a worker providing services would rely on the doctrine of quantum meruit, which infers a promise to pay a reasonable amount for labour/services in the absence of a specific agreement between the parties.

To establish a right of payment, in the absence of an agreement as to payment terms, an individual would need to establish:

  • The value or service rendered;
  • That the service was rendered to that particular company;
  • That the services were accepted, used and enjoyed by that company;
  • That the company was aware that the individual, in performing those services, expected to be paid by them.

That situation is the exception, not the rule, and it would usually be the case that remuneration is outlined within a written or oral agreement.

Once that is established, workers are protected from any unlawful deduction of those wages under Sections 13-27 of the Employment Rights Act 1996.

Employers need to be very careful when either delaying payment of wages or making a deduction. It is likely that this will amount to a repudiatory breach of contract, entitling an employee, to resign and claim damages. There are certain circumstances where a delay will not amount to a repudiatory breach but it is generally accepted that the right to payment on time is a protected right, and the tribunal will treat it as such.

Do clauses entitling employers to make deductions in wages amount to penalties?

There is a generally accepted principle within contract law that any clause which amounts to a penalty is unenforceable. Generally a penalty clause is a clause which seeks to punish the party in breach – but the punishment does not reflect a genuine estimate of the potential loss following that breach.

Recent case law has considered this issue, most notably in Cleeve Link Limited –v- Bryla UK EAT – 0440-12.

The Contract provided that:

  • if Ms Bryla terminated her employment or was dismissed for misconduct within the first 6 months, the Company could recoup the costs of recruitment, bringing her to the UK and training her from any monies due to her;
  • if such a termination happened after 6 months, the amount that the Company could recoup was reduced by 1/6 for each complete month of employment over 6 months.

Ms Bryla was dismissed for gross misconduct within 6 months and was owed unpaid wages at the time. However, this was reduced to nothing, as the employer exercising its right to recoup its costs under the contract. Ms Bryla brought a claim for unlawful deduction of wages.

The Employment Appeal Tribunal held that Tribunals do have to consider the law of penalties, and on the face of it, such a clause may amount to a penalty and be unenforceable.

The decision confirms that Tribunals will regularly consider aspects of contract law and common law principles when reaching their decisions. Tribunals have the power to hear purely contractual claims, and they also regularly consider other aspects of contract law when reaching their decisions. There was no reason why the law relating to penalties should be treated differently.

The case serves as a useful reminder of the law relating to penalty clauses and the relevance of contract law to Tribunal decisions.

For further advice on this area of law, we would be happy to discuss your situation or requirements. Please contact Daniel Blake.

Employment law

Haven't found what you need yet?

Why not search the whole site?

Contact Us

Comments are closed.

Archives