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Unenforceable Employment Agreement Clauses

Published 01 Aug 2015

A recent case in the Employment Court demonstrates how difficult it is for Employers to withhold Employee's pay even though both parties agree to do so in an employment agreement.

A lady was hired as a receptionist in a Christchurch hotel and worked there for about a year. She signed the employment agreement at the commencement of her employment and was aware the position required her to give 6 weeks’ notice to her Employer upon resignation. She was also aware that failure to give the 6 weeks notice the Employer could withhold wages including any holiday pay for the unworked notice period.

The Employee found another job and gave the hotel two weeks’ notice. She was aware that this would be a breach of the contract, however went ahead as the new job was important to her.

The Employer didn’t raise an issue until after the two weeks had lapsed and the Employee had left, where upon wages were withheld as stipulated.

The Employee took the hotel to task over this and the issue went through the Employment Relations Authority (ERA). The ERA decided that it was a penalty, rather than a loss or a claim of damages and compensation for the Employer. The Employer appealed the ERA's decision in the Employment Court to decide “whether the provision of the employment agreement relied on by the Employer to withhold money was enforceable in law”.

The ERA had also decided that the Employee was in breach of the contract and she was ordered to pay a sum of money for doing so.

The Employment Court decided that the Employer would not have suffered any losses as a result of the Employee leaving at any time over the 6 weeks and that someone else had been hired anyway. The withholding of pay was seen as a punishment to the Employee and that “the purpose of the forfeiture clause was to compel the Employee to give six weeks’ notice by holding over her the threat of losing wages if she did not comply”. The Court decided that in 'fairness' the Employee was allowed to be paid what was owing even though the Employer had relied on the clause.

Although the Employee was fined $500 for breaching the contract, the Employer was ordered to pay out the wages and holiday pay, which amounted to $1,943.50. The Crown was the recipient of the Employees $500 fine and not the Employer.