Employer tries to uphold forfeiture clause due to insufficient notice: court weighs in
The Employment Court of New Zealand recently dealt with a case where an employer sought to enforce a notice period forfeiture clause against a worker who resigned with one day's notice, citing medical reasons for her sudden departure.
The worker argued that her health condition made it impossible to continue working, while the employer maintained that the employment agreement's forfeiture clause entitled them to one month's salary due to insufficient notice.
The case highlighted questions about the enforceability of common notice period provisions in employment agreements.
The case involved a window furnishings business in Tauranga that hired a sales and business development representative in September 2022. Prior to accepting the position, the worker had been diagnosed with vertigo in May 2022.
Her doctor advised the symptoms would be temporary. Despite experiencing another vertigo attack between receiving the job offer and starting work, she proceeded with the employment after discussions with the sales manager.
The role involved sharing a busy office space. While the worker had experience in window furnishings, she needed to learn new company systems. No formal performance issues arose, but evidence showed she struggled with some aspects of the role, feeling micromanaged and finding the environment stressful for learning new skills.
In November 2022, she took two days of unpaid sick leave due to recurring vertigo symptoms. Upon returning to work, she met with the company director to discuss her resignation.
The director suggested reducing her workload by removing responsibility for a large client account and focusing on individual customers instead.
He also reminded her about the one-month notice requirement in her employment agreement, to which she reportedly responded that "agreements can be changed."
After completing one more day of work duties in Whakatane, the worker's health deteriorated over the weekend. She called the sales manager on Monday morning to give notice, with her last day being the following day.
She followed up with an email stating she was resigning "due to unforeseen circumstances with the recurrence of Vertigo."
On her final day, she completed a handover of 69 customer files and returned all company property.
The worker described being too tired to discuss matters further when the director raised the notice period requirements again.
Two weeks after the worker's departure, the director wrote to claim payment under the forfeiture clause. The company deducted her final pay of $1,303.85 and sought an additional $3,157.67.
In court, the director explained: "The purpose of the forfeiture clause in the employment agreement is to compensate for the cost that [the employer] will incur as a direct result of [the worker] failing to give the required notice."
He further argued: "The notice period allows [the employer] time to advertise for a replacement or undertake a restructure so that when [the worker] finishes there is either a replacement underway or arrangements have been put in place to cover the workload. This is particularly important for a sales and business development role where there are accounts, customer consults and customer relationships involved."
The Employment Court found no evidence of direct financial cost to the company from the short notice period. While the director and sales manager covered the worker's duties, they received no additional payment, and any lost business opportunities could not be quantified.
The Court noted that although business continuity was important, there was limited evidence that extensive handover was required beyond what occurred on the worker's final day.
The Court found: "When compared with any legitimate interests that [the employer] might have had in performance, the forfeiture provision is exorbitant."
Significantly, the Court determined that "the purpose of the forfeiture clause was to compel [the worker] to give one month's notice, by holding over her head the threatened punishment of having to pay wages if she did not comply. As such, it was a penalty provision which is unenforceable."
For future guidance, the Court suggested: "Had the provision referred to the forfeiture of one month's salary, or the cost or damages incurred by [the employer] as a result of the failure to provide notice, whichever was the lesser, it may well have been enforceable."
The Court also noted that employers have other legal remedies available, including seeking penalties for breach of employment agreement or damages for breach of contract, provided such claims are lodged within the statutory timeframe. However, in this case, the employer did not pursue these alternative remedies.
The Court also found that the employer's deduction from the worker's final pay was unlawful, as it relied on an unenforceable provision and was made without meaningful consultation with the worker.
