The fallout from short notice resignations

Most individual employment agreements (IEAs) state that where an employee fails to give the full contractual notice period when resigning, the employee forfeits the equivalent wages/salary for that period of notice not given. In addition in this circumstance, that amount of money can be deducted from their final pay.

The Employment Relations Authority (ERA) case of Livingston v GL Freeman Holdings dealt with the issue of whether deducting the portion of a notice period not worked by an employee was a penalty or compensation for breach of the agreement.

Ms Livingston was employed as a receptionist by GL Freeman Holdings, owner-operator of the Redwood Hotel in Christchurch. Clause 12.1 of her IEA provided:

“Employment may be terminated by either employer or employee upon six weeks’ notice of termination being given in writing. The employer may elect to pay six weeks wages in lieu of notice and in the event that the employee fails to give the required notice then equivalent wages shall be forfeited and deducted from any final pay including holiday pay. ”

Livingston advised the owner Mr Freeman that she was resigning and could only provide two weeks’ notice instead of the six weeks she was contractually obliged to provide. Freeman told her that if she didn’t give the required notice he’d look to enforce clause 12.1 as she would be leaving him ‘in the lurch’.

Livingston responded that she realised this short notice would cause problems but she needed to take a new job with hours that suited her better.

Livingston’s final pay contained no holiday pay and Freeman had deducted $1,943.50, which equated to wages for the four weeks that she did not work out. A representative for Livingston wrote to Freeman seeking reimbursement of the money owed and asking for evidence of any losses and any steps taken by the company to mitigate those losses. Freeman did not respond.  

Livingston filed in the ERA claiming that the forfeiture by the company of her holiday pay of $1,943.50 was the imposition of a penalty for not giving six weeks’ notice, rather than a genuine pre-estimation of the damage that would be caused in the event of a breach of the notice requirements.

In the ERA, Livingston accepted that she signed her IEA containing the notice period and although she considered six weeks excessive notice did not raise any issues with Freeman about it. Freeman in his evidence explained that the role of receptionist at the hotel was very involved and six weeks gave time to train someone in the position, so the company was not compromised if the receptionist left early.

The ERA stated that the issue was not whether the requirement for six weeks’ notice was unreasonable, but whether the forfeiture provision if such notice is not given is a genuine assessment of liquidated damages or in the nature of a penalty. The ERA noted that parties to an employment agreement are allowed to make an assessment of potential loss at the time they enter into an agreement and it can sensibly avoid the difficulty later of proving loss.

It must, however, be a genuine forecast of the probable loss. It cannot be a provision used to force an employee to perform the agreement by holding a threat over his or her head.

The ERA noted that Freeman said that finding a person with the requisite skills for the receptionist position was difficult and it had no reasons not to accept that, but it also noted that the cost of hiring and training a new person were costs incurred in any event when an employee resigned. The ERA also pointed out that Livingston was not the only receptionist  and that the resources of another staff member would have to be diverted in the event an employee resigned without giving the required notice to train a new staff member.

The ERA found in favour of Livingston, stating that any genuine pre-estimation of loss would have to account for the fact that Livingston would not also be in receipt of wages whilst such diversion of another staff member took place – the likely loss arising from the breach is really very limited. 

The ERA was not satisfied that the greatest loss which could possibly follow from the breach was equivalent to one week’s wages or holiday pay for each week the notice was short. The forfeiture provision was found to be out of proportion and extravagant when compared to any likely loss arising from the breach. 

As a result, it was determined that the forfeiture provision in clause 12.1 of the IEA was not enforceable because it was in the nature of a penalty to compel performance rather than a genuine assessment of liquidated damages. 

Caution should always be exercised when seeking to enforce a forfeiture clause and deducting an amount from an employee’s final pay for not providing the required notice. To avoid problems, employers should have evidence of the additional financial cost incurred by the employee’s breach and any sums deducted should be limited to that amount.