Here’s a question I hear a lot: does an employee lose their holiday pay if they resign without proper notice? It seems like a question that should have an easy answer, but surprisingly it does not.
Let’s assume the parties are in agreement as to what constitutes proper notice – usually this is set out in an employment agreement.
Very often, employment agreements also provide that an employer may elect to pay in lieu of notice, but if an employee gives less notice than agreed, the employee will be liable to the employer for an amount equivalent to what the employee would have been paid in the period by which the notice given was short.
On the face of it, such a provision entitles the employer to recover some money when and employee gives short notice. However, there is always a story behind the story. Here it is.
For a long time, the law has had a problem with what are described as “penalty provisions”. They are contractual clauses which penalise a party for breaking a contract. They are not enforceable.
On the other hand, parties to a contract are entitled to estimate the likely losses associated with a particular breach and agree that much will be paid by a party in default. These are called “liquidated damages provisions”. Damages are compensation for actual loss – for example the cost of repairing a car damaged in a crash. In usual circumstances, the actual loss must be proved by evidence in Court, and this can be complicated and costly. To avoid potential costs on both sides, parties to an agreement may agree to a liquidated damages provision in which they, together, make a genuine pre-estimate of the losses associated with a particular breach. So, we might agree that if you crash my car and it is irreparable, you will pay me $5,000, which we both agree is the value of the vehicle.
In the employment context, the distinction between a liquidated damages provision and a penalty is quite fine. There are a number of cases where employers have relied on an agreement that an employee must pay them the equivalent of the employee’s pay in a deficient notice period, and the Courts have responded that this is nothing more than a penalty provision, and therefore not enforceable.
To be enforceable, any agreement about compensation for a short notice period must represent a genuine pre-estimate of the employer’s likely loss should the employee breach this part of the employment agreement. So, the parties might agree that the employee will be required to pay to the employer the additional cost associated with hiring an agency worker to replace the employee, estimated by the parties to be $100 per day. Or there might be agreement that the employer will lose profit of $200 per day for every day the employee is not present, and the employee agrees to compensate the employer for that loss.
While the wages payable in the notice period might be a convenient way to think about likely losses, it is unlikely to be reliable as a genuine, agreed, pre-estimate of actual loss – so it is more likely to be a penalty provision than a liquidated damages agreement. In a 2015 case on this point, the Employment Court noted that the assessment of loss wasn’t on either party’s mind when the employment agreement was signed, so it could hardly be said that the parties had pre-estimated losses.
To confuse the matter, be aware that the Employment Relations Authority or Employment Court may impose a Penalty (capital “P”), which is essentially a fine for breaching an agreement. An employee can be liable for a Penalty for giving short notice, but this fine is paid to the Crown, and can only be imposed following an investigation or hearing by the Authority or Court. Taking proceedings on this point is unlikely to be economic for an employer.
If recovery from an employee in the case of a short notice period is important, then employers should specifically turn their mind to the issue at the outset of the employment, and discuss with the employee how losses might be calculated. The employment agreement should explain what the level of loss is agreed to be, and what that figure relates to. A useful clause might look something like:
The parties agree that if the employee leaves without giving the notice required in this agreement, the employer will be required to hire a temporary replacement at short notice. The parties acknowledge that such a consequence will incur agency fees of approximately $100 per day in addition to ordinary employment costs. Therefore, where the employee gives less notice than that required by this agreement, the employee will pay to the employer the sum of $100 for every working day by which the notice is short.
So, short answer: an employee might in some circumstances be required to pay something to an employer if they do not give appropriate notice. What might be payable must be set out in the employment agreement, and can not be a penalty.
That answers half the question. Next week, I’ll answer the second part – which is whether the money owing to the employer can be deducted from the employee’s holiday pay.
