When resigning from a job, an employee may ask what their employer can do if they don’t give the notice that is required by their employment agreement. After all, you can’t force someone to work for you.

There are two actions an employer can take in such situations.

The most common is to get reimbursement for the financial loss suffered by the employer due to the lack of sufficient notice. This can either be by deducting the amount from the final pay (only possible if that is provided for in the employment agreement), or applying to the Employment Relations Authority for damages.

For this reason, many employers included a forfeiture of wages provision in the employment agreement.

Another, less usual, action is to apply to the Employment Relations Authority to impose a penalty on the ex-employee for breaching their employment agreement (by not working the required notice). Section 134 of the Employment Relations Act 2000 states that every party to an employment agreement who breaches that agreement is liable to a penalty.

Forfeiture of wages

Employers can only deduct wages in lieu of notice if there is a forfeiture clause in the employment agreement that allows them to do so. Otherwise, employers must pay employees for the days that they worked and their holiday pay due on termination of employment, even if the employee did not give any notice (or less than provided for in the agreement).

The amount of the payment or forfeiture generally relates to the period of notice, ie where a week’s notice of termination is not given or received, a week’s wages may be paid or forfeited.

Alternatively, the agreement may provide for a proportional payment or forfeiture for an incomplete period of notice, ie the balance of the notice shall be paid or forfeited.

The amount of wages to be forfeited must be in proportion to the loss and be a genuine pre-estimation of the damage that would be caused if the notice requirement was breached. It cannot be a penalty because if it is, the forfeiture provision will be unenforceable.

Parties to an employment agreement can make an assessment of potential loss at the time they enter into an agreement, avoiding the difficulty later of proving loss.

It must 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.

Case example: Proportion to loss

Labour Inspector v Cornerstone Enterprises Ltd t/a Dee Night ‘n Day (2010) was a claim for recovery of holiday pay for a former employee who had given only 4 days’ notice before leaving his job. The company withheld the employee’s holiday pay in reliance on its forfeiture clause.

The employment agreement (by reference to the company’s handbook) required 4 weeks’ notice of termination by either party. Where the requisite notice was not provided, 4 week’s wages was to be paid or forfeited by the party who failed to give or work the notice.

The Employment Relations Authority noted that this clause in the Night ‘n Day handbook was well known to it, being the subject of four determinations already. In the first two cases, the Authority had enforced the clause. In the later two cases, the Authority did not enforce the clause because it was a penalty.

The Authority referred to the principle provided by case law that it is unconscionable in a case of breach of contract to recover a sum that is out of all proportion to the loss that occurs. However, a genuine pre-estimation of likely damages in a contract is acceptable.

In this case, the company claimed that an employee leaving at short notice was inconvenient and incurred greater training costs for the new employee. However, the company was unable to quantify the loss suffered as a consequence of the employee’s failure to give 4 weeks’ notice.

The Authority determined that the forfeiture clause was a penalty provision. Four weeks’ wages was a sum that was out of proportion or extravagant in comparison to any likely loss arising from the breach.

There was no evidence of actual loss and training would have to be provided to a new employee in any event. The forfeiture clause was not enforceable and the company was ordered to pay the employee his holiday pay.

The Authority added that the labour inspector’s submission that all forfeiture clauses are penalty clauses and unenforceable went too far. An analysis of the facts of each case is usually required.

Case example: Abandonment

In Dominion Trading Company Ltd v Jane (2007), there was a written employment agreement in place that provided for 2 weeks’ notice of termination of employment, and forfeiture of 2 weeks’ wages if such notice wasn’t given.

Several weeks after Jane started his job, he phoned in sick. This was the last time the company heard from him. The company tried to phone him, and left messages on both his home phone and on his mobile.

When there was no reply, he was sent a letter reminding him that his employment agreement stipulated that he must give 2 weeks’ notice if he was resigning. Jane did not respond. Almost a week later, another letter was sent to him. Again, there was no response.

The company lodged a claim with the Employment Relations Authority to recover 2 weeks’ wages from Jane in lieu of notice, plus reimbursement for the cost of overalls that had been supplied to Jane.The Authority noted that Jane had not acted in good faith. It determined that Jane had abandoned his employment, and the company was entitled to 2 weeks’ wages (as stipulated in the employment agreement) and reimbursement for the overalls that Jane had failed to return.
Jane was ordered to pay the company $1077.53 as forfeiture of wages, and $100 for the overalls, plus the $70 lodgement fee that the company had paid.