Last updateTue, 24 Feb 2015 5pm

EMPLOYMENT CONTRACTS: Parameters of penalty clauses

05 September 2014  

Nicola Bartholomew and Heather Barc consider two recent cases on penalty clauses in the employment context

Employers can invest a significant amount of time and money recruiting and training the right employee with the requisite skills to fulfil a particular role. As a result, they often seek to protect themselves against the loss they may suffer if an employee leaves before they can find a suitable replacement or before they have received the benefit of the employee’s specific training. The law prevents unlawful deductions from wages, so employers often seek to set out in an employee’s contract of employment particular situations in which they will be permitted to recover specified amounts by way of a deduction, typically from a final payment of wages. However, in drafting those provisions, employers and their advisers must consider the law on penalty clauses and assess what the deduction is designed to achieve. Otherwise, the provision may be struck out as an unenforceable penalty clause when a former employee objects to a deduction from their salary.

Additional Info

  • Case(s) Referenced:

    Cleeve Link Ltd v Bryla [2013] UKEAT 0440/12/0810

    Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] UKHL 1

    Giraud UK Ltd v Smith [2000] UKEAT 1105/99/2606

    Li v First Marine Solutions Ltd & anor [2014] UKEAT 0045/13/0403