Law Update: Is a repayment provision in a contract of employment an unenforceable penalty?

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Employment contracts may sometimes require an employee to pay back the costs of, for example, training – if he or she leaves the company. In the second of her legal updates, our guest blogger Andrea London of Rosenblatt Solicitors takes a look at how enforceable such provisions actually are…

Background

In response to ever-increasing recruitment costs as well as to remain competitive, many employers are investing in developing their employees’ skills. This has led to a marked increase in the use of ‘repayment’ clauses in contracts of employment. While employers want to have the best and well-trained staff, they don’t want to be left “high and dry” if an employee leaves to join a competitor shortly after a long recruitment process or just after any employer-funded training is completed. However, some repayment clauses are drafted with a heavy hand, and are overly onerous on the employee. Not surprisingly, employees often seek to circumvent any burdensome repayment clauses by alleging that they are a ‘penalty’ clause and so, unenforceable. This, in turn, can lead to a prior repayment becoming a claim by the employee for an unlawful deduction from wages.

The enforceability of such repayment provisions in contracts of employment was recently considered by the Employment Appeal Tribunal (EAT) in the case of Cleeve Link Ltd v Bryla UKEAT/0440/12. Cleeve dealt specifically with the issue of whether a repayment clause of the kind often used in contracts of employment was enforceable against the employee.

The Facts

Cleeve’s contract of employment had stated that that if Ms Bryla terminated her contract or was dismissed for misconduct within the first six months’ of her employment, Cleeve could recoup the total cost incurred in recruiting her from any money due to be paid to her under her contract. After six months’ of employment, the amount reduced per month.

Ms Bryla was dismissed after only three months’ for gross misconduct. Cleeve relied on the repayment provision and recouped the full amount of recruitment costs against her unpaid wages. Ms Bryla brought a claim in the Employment Tribunal for unlawful deduction from wages. The Employment Tribunal held that the repayment provision was a penalty clause and was unenforceable; therefore deductions made by Cleve from her wages were unlawful. On appeal to the EAT, it was held that the Employment Tribunal had erred in its finding; that the clause in question was not a penalty clause but a liquidated damages clause – and was therefore enforceable.

Penalty or liquidated damages?

A ‘liquidated damages clause’ is a clause in a contract which specifies a fixed or determined sum to be payable on a breach by one party to the other (innocent) party. Case law has clarified that in order to determine whether a clause is liquidated damages or a penalty, it must be a genuine reflection of an employer’s pre-estimate of loss that it is likely to suffer if the employee breaches that provision. The key to a repayment sum being regarded as a genuine pre-estimate of loss appears to be that the sum specified must be compensatory.

Practical tips for employers

When including any kind of repayment provision in an employment contract, it is advisable for employers to consider the following points:

1. Ensure that the amount quoted to be payable on breach and/or accordingly deducted from an employee’s wages is a genuine pre-estimate of the loss that would be suffered by the employer if the employee breaches the clause. Ensure the sum is not just a deterrent amount.

2. Bear in mind that the clause will be construed on the basis of how it was drafted at the time the contract was entered into and not at the time of any trigger event or breach.

3. A clause is presumed to be a penalty if it seeks to recover the same amount of money whether the trigger for repayment is, for example, a significant event or just a minor breach.

4. An employer should keep any proof they have (ie calculations) about how they arrived at the amount of repayment sum included in a contract. This may be needed as evidence that the employer properly considered the potential loss it may suffer on a trigger event occurring and that the repayment sum is not just a random figure.

Legal Disclaimer: This article should not be taken as definitive legal advice on the subject covered. If you require legal advice on any of these matters please contact Andrea London of Rosenblatt Solicitors on 020 7955 1433 or email andreal@rosenblatt-law.co.uk

 

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