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Unlawful deduction from wages

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Were 'Bad Leaver' provisions forcing an employee to give up a shareholding a penalty or an unlawful deduction from wages?

No, held the EAT in Nosworthy v Instinctif.

Miss Nosworthy was given a small (2%) shareholding in her employer as a condition of its sale to Instinctif Partners Ltd.  Under a Share Purchase Agreement and the Articles of Association the shares of a 'Bad Leaver' were re-acquired. A Bad Leaver included someone who voluntarily resigned. Miss Nosworthy resigned, was treated as a Bad Leaver, and had to transfer her shares. Under the Articles her shares were valued at acquisition cost, a total of £143.

An employment tribunal considered it was competent to hear Miss Nosworthy's complaint about the forced share transfer on the basis the SPA was a "contract connected with employment" for the purposes of its breach of contract jurisdiction. However, it decided the Bad leaver provisions were neither, as contended, unconscionable, nor a penalty. Nor was the forced share transfer an unlawful deduction from wages.

The EAT agreed. The criteria for setting aside an agreement as unconscionable in Alec Lobb (Garages) Ltd v Total Oil (GB) Ltd were not satisfied. This was not a case of serious disadvantage, whether through poverty, ignorance, lack of advice or otherwise, leaving the individual vulnerable to unfair disadvantage. Nor were the Bad Leaver provisions a penalty. A penalty is a sum or remedy stipulated as a consequence of a breach of contract. But here the re-transfer obligation arose because of the terms of the Article of Association, not because of a breach of contract.

Finally, the Bad Leaver provisions were not an unlawful deduction from wages within the meaning of the Employment Rights Act 1996 as the claim was barred by section 27(2)(e), which excludes from the definition of wages "any payment to the worker otherwise than in [her] capacity as a worker". The shares were provided to Miss Nosworthy as a vendor of shares, not in her capacity as a worker.

Thanks to Dr John McMullen of Stone King LLP for preparing this case summary.