GL Freeman Holdings v Livingston

Over the years I have seen a number of employment agreements with a clause that penalises the employee if they do not give the required amount of notice.  This is a case where the penalty clause has been tested for the first time in the Employment Court.

Freeman Holdings Limited owned a major hotel complex in Christchurch. Ms Livingston had considerable experience in the hospitality sector and was desperate for work after losing her job following the earthquake, so she accepted the role of receptionist with Freeman. In doing so she signed an employment agreement with a requirement for 6 weeks leave and a forfeiture clause that she disagreed with, although she did not voice her disagreement.

The penalty clause stating that “in the event that the employee fails to five the required notice then equivalent wages shall be forfeited and deducted from any final pay.” After twelve months Livingston found another job and gave 2 weeks’ notice, four short of the agreed 6 week notice period. Freeman duly withheld her final pay, which amounted to about 3 weeks’ pay.

Livingston took the matter to the Employment Authority which concluded that the penalty provision was not enforceable, Freeman should pay her the $1,943 it had withheld and Livingston was to pay Freeman $500 for breach of contract. Freeman sought a new hearing in the Employment Court.

The issues considered by the Court were whether the penalty clause was enforceable, whether Livingston should be penalised for the breach of contract and if so, how much.

The decision drew on the principles of contract law and looked into the concept of liquidated damages and penalties for breach of the contract. In this case, liquidated damages are an agreed, genuine, estimate of the damages that will be incurred if the employee fails to give sufficient notice. If, however, the clause is in place to compel the employee to give the full amount of notice, it is considered to be a penalty. The size of the penalty has to be proportionate to the actual loss experienced by the injured party and it is unconscionable if a sum is demanded “which, although certainly fixed by agreement may be disproportionate to the injury”.

The challenge was for Freeman to demonstrate that the amount forfeited was a genuine estimate of the loss or proportionate to the experienced by the short notice period.  Freeman included this same clause in every employment agreement and admitted that the company suffered no financial loss from Livingston’s short notice. It had to pay a relief receptionist more hours, but this was compensated by the wages it was not paying Livingston. Mr Freeman argued it had caused him and the relief staff stress, but the Court said that a company cannot suffer personal stress.

The Court concluded that the intent of the clause was to act as a penalty and therefore looked at what was an appropriate level of penalty in such circumstances. The Employment Relations Act allows for the Court to impose penalties for breach of contract, and like any other compensation it awards, this must reflect the precedents that have been set.

The Court concluded that “agreements are made to be kept”, Livingston deliberately broke the agreement and there should be some deterrent to such behaviour.

Freeman was ordered to repay the $1943 and Livingston was required to pay a penalty of $500. Exactly the same outcome as the Employment Authority had reached. The taxpayer could have been saved the expense to a Court hearing, if the employer had just accepted the decision. Now he has to pay his legal expenses and contribute to Livingston’s as well.

If employers want to impose penalties for staff giving insufficient notice in future, it is advisable to have a clause in the employment agreement that specifically states it is a penalty and the figure. More than $500 could require an explanation in court. Of course there would be some situations where a departure to this will be justified, but they will be unusual and the employer should get specialist advice before developing such a clause.