Authority discusses nature and purpose of 'forfeiture clause'
The Employment Relations Authority recently dealt with an employer’s claim against a worker who did not provide the required one-month notice period under her contract before she resigned.
The company filed a claim before the Authority to collect the worker’s wages, arguing that it represented the business losses that it suffered for her failure to inform the management of her plans.
Teina Deadman started working for Caleys Limited (trading as Caleys Blinds) in Tauranga on 14 September 2022. A few months later, on 18 November, Deadman talked to one of the employer’s directors, expressing her intention to resign.
During their discussion, she cited her concerns about the workplace environment being “too noisy” and its impact on her ability to learn her new role.
The parties discussed how to manage her current workload, with management noting the terms of her individual employment agreement (IEA), which required a month's notice for resignations or the forfeiture of a month's salary. However, Deadman did not resign on that particular day.
Subsequently, on 21 November, Deadman contacted Caleys' sales manager to officially file her resignation. Likewise, the sales manager reminded her of the one-month notice requirement as specified in her IEA.
Later that day, Deadman formally submitted her resignation via email to management, citing "unforeseen circumstances with the recurrence of vertigo" as the reason for her resignation and setting the effective date as 22 November.
After she resigned, the employer pursued the amount of $3,157.67, representing a month's wages, based on the IEA's forfeiture clause.
Despite Caleys' efforts to secure payment, no funds have been received. It communicated with Deadman on 5 December and again on 15 December.
On 19 December, Caleys filed a claim with the Authority. During the proceedings, Deadman revealed that she had been diagnosed with viral vertigo in May 2022.
Moreover, she said that in her job interview with Caleys, she disclosed her vertigo as a health condition. Following her acceptance of the position, she experienced an "attack of vertigo" and informed management that she should decline the role.
However, she was convinced to proceed, leading Deadman to believe that Caleys was fully aware of her health condition when she was hired.
Deadman added that shortly after starting her role at Caleys, she found the work environment unsuitable for her learning process, particularly due to being the sole sales representative and the need for training. She expressed concerns about feeling stressed, having to work late without prior notice, and experiencing micromanagement.
She claimed that on 17 November and 18, she suffered from vertigo. On 18 November, she raised concerns with management regarding her health and the job's challenges but felt that genuine efforts to address these issues were inadequate.
She said her health deteriorated due to vertigo and workplace-related stress, prompting her to prioritise her well-being after the weekend.
Deadman believed she couldn't work to her full capacity and, as a result, resigned without providing a month's notice, thinking it was the right course of action given her limitations.
Furthermore, she argued that her resignation did not result in any financial loss for Caleys, as she had successfully handled her customers from the home show and existing clients, achieving a high number of sales.
On the other hand, the employer submitted that the purpose of the forfeiture clause in Deadman’s IEA is to “compensate for the loss/cost” that it “will incur as a direct result of the employee failing to give the direct notice.”
It said the notice period was required to “allow Caleys time to advertise for a replacement or put arrangements in place to cover the employee’s workload.”
It said the period in which Deadman resigned was Caleys’ busy period (September to Christmas each year). Caleys says that three weeks prior to Deadman’s resignation, it had generated an excess of 160 enquiries following a home show.
The employer argued that “had Deadman provided the requisite notice, her last day would have been 20 December 2022.” Caleys said “no replacement for Deadman was employed before [the] Xmas [sic] break up.”
Due to her absence, the employer said, “her work was undertaken by the sales manager and the company director, which involved them working outside their normal hours and included the opportunity cost of them not undertaking other business.”
The Authority said, “the law on forfeiture clauses recognises that they are generally unenforceable against employees for failure to work their notice period unless the employer has suffered an actual loss.”
“This is because forfeiture clauses are considered as imposing a penalty rather than recovering a loss to the employer. The issue is not whether the requirement to give a month’s notice is unreasonable, but whether the forfeiture of a month’s wages arose from a genuine assessment of liquidated damages as a result of not providing notice or arose from an intention to secure performance of the notice provision,” it said.
“Caleys has characterised the payment of wages to other higher paid staff for working after hours and weekends as a ‘loss’ and is seeking to recover an amount equating to Deadman’s monthly wage,” it said.
“Although [there was] some inconvenience that would have occurred, upon further scrutiny, [the employer’s] calculation of the business ‘loss/cost’ unsupported by clear and verifiable evidence,” it said.
The Authority also noted that “Deadman was unwell during this time, and had she not resigned, she would have remained unlikely to carry out all her tasks, thereby requiring additional resourcing support on the part of Caleys in those circumstances.”
“The forfeiture clause is by nature a penalty clause designed to compel performance of the notice period and is not a genuine assessment of liquidated damages. Therefore, Caleys is not entitled to rely on the forfeiture clause against Deadman,” it said.
Thus, it rejected the employer’s claim against the worker.
