Guy Guinan, employment partner, Halliwells
When an employee decides to leave, too often it appears that the contractual notice period is treated as just an annoying formality by people who will try and get around it and leave at the earliest opportunity. Some employment contracts therefore make provision for recouping any losses incurred by employers as a result of employees failing to work their notice, but these are difficult to enforce.
Q What should employers state in clauses on working out contractual notice periods?
A The contract should stress the importance of complying with the notice period and the employee’s attention should be drawn to the express enforcement provisions. These could include an agreement that the employee will pay a specified sum as compensation should they breach the notice provisions. This is known as an agreed ‘liquidated damages’ clause, and has the advantage of making the employee aware of how seriously the employer regards compliance with the provision and the consequences of breaching the clause.
Q How watertight are such clauses, legally?
A The big drawback with a liquidated damages clause it is that it is often seen as a penalty clause in the employment context and will not, therefore, be enforced by the courts. This is because the courts are wary of the unequal bargaining position between employer and employee when it comes to agreeing the terms and conditions of employment. Thus it may be inferred that there has been no true agreement as to the validity of the sum specified. However, all the circumstances will have to be taken into account, and it will clearly be relevant if the employee has had an input regarding the terms or taken legal advice prior to finalising the contract.
Q Under what circumstances are employers likely to take action against employees who breach such clauses?
A If the employee does leave early, but is quickly replaced or their duties are absorbed by other staff, then the reality is that it is unlikely the employer will take action against the departing employee. The employer will probably not wish to go to the trouble and expense of issuing court proceedings to try and enforce payment of the debt. However, if the employee had occupied a key position and had refused requests to complete their notice, so causing the business to lose money, then it is much more likely that legal action will be taken.
Q How should claims be calculated?
A The advantage of the agreed liquidated damages clause is that it sets out the sum that is due to be paid without the employer having to show the actual losses. The attraction of this to the employer is that it avoids disputes as to what actual losses flowed from the breach. However, the employer should take into account when stipulating the sum that a court is much more likely to find that an agreed liquidated damages clause is a penalty clause where the amount stipulated to be payable is much higher than the actual level of damages.
Q What defence would the errant employee have?
A If faced with a legal claim for compensation under an agreed damages clause, the employee is likely to raise the issue of whether the clause does amount to a penalty. In addition to claiming that the stipulated amount is too high to be an accurate assessment of damages, the employee will often stress the inequality of the bargaining position between them and the employer and the fact that they were not able to negotiate the terms of the contract.
Q What if the employee refuses to pay?
A Proceedings in the civil courts would have to be issued to enforce payment of the sum due. Before issuing proceedings, the employer should carefully assess the likelihood that the clause would be seen as a penalty, taking into account the approximate cost to the business. Obviously another important factor to take into account before starting proceedings is whether the employee would be in a position to pay the sum stipulated.
Q Can the employer bring proceedings to enforce the notice period where there is no liquidated damages clause?
A The employer may still bring proceedings as there has been a breach of contract. The application could be for an injunction, but it is more likely to be limited to compensation. In the absence of a liquidated damages clause, the employer would have to show the losses flowing from the breach of contract. This would mean calculating the net losses having taken into account all steps the employer has or could be reasonably expected to take to reduce the losses incurred.