News and Events

Repayment Clause: Unenforceable Penalty?

  • Posted

Thanks to Paul Smith of Broadway House Chambers for preparing this case summary

Can a tribunal consider whether a repayment clause is an unlawful penalty?  Yes, holds the EAT in Cleeve Link Ltd v Bryla.

The employer had paid money for fees and air flight to the agency which recruited the employee from Poland. The employment contract stated that such fees and costs could be deducted from the employee's wages, on a sliding scale which reduced over time. The employee was summarily dismissed for gross misconduct 12 weeks into her employment, whilst the clause was still in effect.  The employer set the fees off against outstanding salary, and she brought an unauthorised deductions claim.

The employer argued that the question of whether the deduction clause was enforceable was irrelevant to the statutory scheme under Part II of the Employment Rights Act 1996. On appeal, the EAT (HHJ Hand presiding) disagreed, stating that an employment tribunal's jurisdiction frequently involves the application of common-law contractual principles to situations where the cause of action is statutory.

The EAT also provided guidance as to when a repayment clause may be enforceable. The starting point is to look at the contract when it was entered into. Then the tribunal must decide, objectively, whether the purpose of the clause was to deter or to represent a genuine pre-estimate of loss. This question may involve a comparison between the amount stated in the clause and a realistic figure the employer might recover. If the difference is "extravagant" or "unconscionable", the clause is likely to be unenforceable.