Resigning without Notice – Forfeiture of Wages or Withholding Final Pay

Most employment agreements say that should an employee fail to give notice they will forfeit pay equivalent to the notice period: But both parties should be clear about the dangers if this kind of situation arises, for the devil is in the details as Judge AA Couch showed in what probably was his last decision as a Judge of the Employment Court.

The case was GL Freeman Holdings Limited the owner and operator of the Redwood Hotel in Christchurch. The employee was Diane Livingstone. The facts are relatively simple. She signed an agreement requiring her to give 6 weeks’ notice but she only gave two. She said she had needed the job and signed the agreement even though she thought 6 weeks notice was unreasonable for a receptionist and administrator.

The company withheld her final pay which amounted to about 3 weeks wages. She said she found Mr Freeman difficult to get on with describing him as having a very aggressive and confrontational style of management but she gave no evidence of any specific events. Mr Freeman said Ms Livingstone’s employment went without incident, that she was experienced and was generally regarded as a good employee. The evidence before the Court showed that Ms Livingstone resigned to take up other employment.

Interestingly, Mr Freeman used the six weeks notice in all employment agreements. This meant the notice period applied to cleaners and bar staff. This is most odd. Typically staff carrying out this type of work have to give between one or two weeks notice and when they need to resign to take up another job we consider few  employers will want to wait six weeks for them to start. Surely as a publican Mr Freeman knew this; well did he? Yes, because by the time he gave evidence to the Employment Court, he had received a decision from the Employment Relations Authority on a claim from Ms Paengkam a cleaner who worked at the hotel over the withholding of her pay for failing to give the six weeks notice. The Authority accepted the evidence of the Payroll Clerk for the company that when a cleaner leaves, it is generally easy to recruit a replacement within a week or so. It therefore concluded that given the clause conceivably permitted a deduction of $1480.00 which would clearly significantly exceed the cost reasonably incurred by the company as a result of a cleaners failure to give full notice, the clauses in the employment agreement constitute unlawful penalty provisions.

Another interesting fact in Ms Livingstone’s case is that Mr Freeman did not challenge her over the deficient notice. Had he done so she might well have found a solution. As we know she could have responded by providing the correct notice. While the Judge did not say anything about Mr Freeman’s failure to say anything at the time, it may well have encouraged the Judge to conclude that the company was treating the clause as a penalty. So too may have been the distant voices of employers the Judge had acted for when he was a barrister declaring they will teach their employees a lesson  for not giving them the correct notice by withholding their final pay. Mr Freeman is welcome to explain through our site  why he did he not say anything to Ms Livingstone when she gave the deficient notice.

Mr Freeman conceded the company suffered no financial loss as a result of having received less notice than they were entitled to receive. He claimed it was to compensate the company for the stress of having to recruit new staff when less than six weeks’ notice was given. Whose stress was it? Well the Judge pointed out a company cannot suffer personal stress. We know of course Mr Freeman was not the employer and, therefore, any stress he might suffer may be understandable but is not compensatable.

The Judge concluded that the purpose of the forfeiture clause was to compel compliance with the notice provisions by holding over Ms Livingstone the threat of losing wages if she did not comply. It was a penalty, he declared, which in equity and good conscience the Court ought not to allow the company to enforce. But was that the end of the matter. No.

The Employment Relations Act 2000 says that every person who breaches an employment agreement is liable to a penalty which Judges and Authority Members can impose. The Authority had banged Ms Livingstone with a penalty of $500.00 half of which went to the company and half to the Minister of Finance Bill English who as we know  has emptied the piggy bank and searching for every cent he can find. Judge Couch however gave the lot to Bill because the company suffered no loss or injury. While Judge we cannot fault your reasoning initially we thought that was a bit tough but given what we suspect was happening maybe it was not.

Are these provisions largely unenforceable? The law allows clauses that provide genuine and reasonable liquidated damages for a breach. The company argued this is what their clause provided. The problem they ran into (and most employers will run into) is that it is difficult to describe the damage that would be incurred through a failure to give notice. In the Livingstone case Mr Freeman in the end had to concede there was no financial loss. The Authority Member in the Paengkam Case knew the Employment Court was to consider the Livingstone Case and could overturn the Authority’ decision that that the clause was unlawful. However, he was not put off by this, recognising that it is question of fact in each case whether a notice period is a genuine pre-estimate of loss or a penalty.

The best advice we can give to employers is that they should ensure the notice period is reasonable  and tailored to the particular position. Think about what losses might occur if the full notice period is not given and factor in the wages you won’t have to pay as a result of the person leaving. The alternative to deducting wages is to give the employee the opportunity to give the correct notice period and if they fail to do so then  file with the Employment Relations Authority for penalties. In anticipation that some employers will want to do this we have set up a template that will make filing an application simple and cheap. Under recent changes to the law, the Authority  can give oral judgements and given their workload we reckon they will pump out decisions when the problem is as simple as a failure to give the correct notice.

An employee should not sign up to agreements providing what Ms Livingstone described as an unreasonable notice period. Also they should not just blow off working out their notice period or worse not give notice without fear of any consequences. As Ms Livingstone would no doubt tell you, the cost both in terms of penalties and legal fees, coupled with sleepless nights are damn good reasons for complying with the agreement. And remember you can always approach your employer and ask them whether you can work something out with them that would allow you to give less notice. Sometimes they will be only too pleased to see the back of you; other times they might only want you to provide a handover before leaving within the notice period. There is never any harm in asking.

PS: We understand Ms Livingstone’s replacement started within the two weeks notice period, although this person did not stay long.

Published on Thursday, August 20th, 2015, under Blog