Contracts of employment often include clauses enabling employers to recover money such as the costs of training, tools or uniform on the termination of employment or for the failure to give the full period of notice by an employee. The legality of this type of clause was most famously challenged in the area of refundable maternity pay. In the European Court of Justice it was argued unsuccessfully that it was a breach of equal pay law to require women to refund contractual maternity pay if they left employment within a certain period of their maternity leave (Boyle v EOC [1998] IRLR 717).
But the legal enforceability of other types of repayment clauses can be more precarious as has been shown in these two recent cases. The issue most frequently arises when an employer withholds all or part of an employees final salary (and in some instances threatens to sue in Court for the balance) and the ex-employee brings Tribunal proceedings for breach of contract or claiming the money withheld is an unlawful deduction.
If the repayment clause operates as a penalty against the employee who is in breach of contract, then the employer cannot enforce it. Unless the sum in the clause is a genuine pre-estimate of likely loss from the breach by the employee, it will be a termed a penalty.
In two recent cases Employment Tribunals have taken a robust view of these clauses offering some protection for workers. In Giraud, Mr Smith was a driver and under his contract he was required to give 4 weeks notice if he wanted to leave and that a failure to give the Company the period of notice would result in a deduction from final payment equal to the number of days short. Mr Smith left without giving any notice and the Company refused to pay him four weeks money.
The Tribunal found that the sum deducted bore no relation to the loss that the company might suffer as a result of his resignation without notice. New drivers could be easily found and the Tribunal concluded that the intention of the clause was to deter other employees from leaving without giving notice and was unenforceable. The EAT agreed.
Mrs Knight was employed as a bus conductor, her contract said that if she left work within one year she had to repay her employers £500 for her training and uniform. She was sacked after four months and had the £500 deducted from her final salary. The employer relied on the contract and said it could not be a penalty because it was not in respect of a breach of contract by Mrs Knight. But the Tribunal said that as Mrs Knight was not in a position to bargain on her terms when she joined the company and the £500 was not a genuine pre-estimate of cost. The employers had to repay the amounts deducted to Mrs Knight. The repayment provision was set aside by the Tribunal.
Just because repayment clauses of this type are in the contract, they may not be worth the paper they are written on.