Complainant

Respondent

Parties

Patricia  Rosado

Ashbrook Pharmacies Limited

Representatives

Senanta Landers Solicitors

 McInnes Dunne Murphy Solicitors

Act

Complaint/Dispute Reference No.

Date of Receipt

Complaint seeking adjudication by the Workplace Relations Commission under section 6 of the Payment of Wages Act, 1991

CA-00044545-001

10/06/2021

Complaint seeking adjudication by the Workplace Relations Commission under section 6 of the Payment of Wages Act, 1991

CA-00044545-002

10/06/2021

The Complainant alleged that the recovery of a recruitment agency fee, provided for in the contract in the event of termination of employment, was both unenforceable due to the vagueness of the clause and that it was a penalty clause and therefore an illegal deduction under the Act. The Complainant also alleged that the retention of an overpayment of wages in her final payroll was an illegal deduction.

The Complainant was employed as a Pharmacist by the Respondent. She commenced her employment on 21 July 2020. The Complainant resigned from her position on 7 December 2020.  She provided the Respondent with two months’ notice. The Complainant’s last day of work with the Respondent was 1 February 2021. She worked for over seven months with the Respondent.

The Complainant received a letter from the Respondent, after her resignation, dated 25 January 2021. The letter stated that there was an overpayment of wages made to the Complainant from August 2020 to November 2020. It stated the salary payable to the Complainant was at a rate of €60,000 per annum under the contract of employment, however the Respondent had paid the Complainant a rate equivalent to €65,000 per annum from the months August to November 2021. The Respondent’s calculated that there was overpayment to the Complainant and an amount of €1,143 was due and owing to them.

The Respondent also claimed that the Complainant owed them full reimbursement for the fee they paid to a recruitment agency for their services when they hired the Complainant. They claim the amount owing to them in respect of this payment is €7,000. The Complainant confirms that she engaged with a recruitment company called Medpharm and an interview was arranged with the Respondent through them. There were email exchanges and telephone calls between the Complainant and the Medpharm representative to arrange the interview and a trial day with the Respondents. This was the extent of the Complainant’s engagement with the recruitment company. The Complainant was not advised at that point, nor at any point up until the week before the Complainant’s last day working for the Respondent of the amount of the recruitment fee.  The Respondent’s rely on the contract of employment to justify the imposition of this debt on the Complainant. Clause 20 of the employment contract states “In the event of termination and to compensate the company for costs incurred towards your recruitment the following rebate will apply.

Termination within 12 months=100% of costs will be refunded.”

Clause 5 of the contract states “if you discover an error in your pay, either an overpayment or an underpayment, you are required to notify your line manager immediately. All adjustments for overpayments or underpayments will be made in the next payroll following discovery.

The Company shall be entitled to deduct from your salary or other payments due to you any money which you may owe to the company at any time”

The Respondent withheld €9,134.00 from the last payment owed to the Complainant. The last payment due to the Complainant was comprised of her first month’s wages, which was withheld from her at the time, and her last month’s wages. The Respondent also failed to pay the Complainant for her annual leave entitlements which had accrued. The Complainant calculates this entitlement to amount to approximately €846.23. The Complainant calculates the total amount owed to her as €9,980.73.

The Complainant engaged Hatstone (Ireland) LLP (formerly Tully Rinckey LLP) who wrote to the Respondents on 1 February 2021. The letter states that the overpayment of wages was only brought to the Complainants attention when she resigned from her position which is not in line with clause 5 of the employment contract. The letter further states that the Respondent unilaterally applied the recruitment charges to the Complainant and that there was no substantiation for the fees provided to the Complainant prior to the deduction being made, or at all. The letter goes on to state that withholding wages owed in order to recoup the recruitment fees is not permissible under section 5 of the Payment of Wages Act 1991 and clause 20 of the employment contract is a penalty clause which is also not permissible.

Ms Louise Mulcahy for the Respondent, replied on 5 February 2021. The letter referred to the provisions in the employment contract which have already been set out above. Ms Mulcahy stated that reimbursement for the overpayment of wages would not have been sought if the Complainant had remained employed with the Respondent. Ms Mulcahy again failed to provide support for the €7,000.00 recruitment fees. Hatstone replied to the Respondent by letter dated 12 February 2021 and states that the Complainant will be opening a claim to recover the full amount owing to her. The letter further requests the invoice from the recruitment company which ground their claim. To date this has not been furnished.

Clause 20 in the employment contract states that there will be a 100% rebate applicable for recruitment costs expended by the Company if termination of employment occurs within 12 months. We submit that this clause is ambiguous and is incapable of being enforced. The clause does not state that the employee is responsible for the rebate and there is a deficiency of clarity in this clause. The Complainant also had significantly less bargaining power than the Respondent at the time the contract was signed and she was not in receipt of the details of the recruitment fees. Clause 20 is an unconscionable term and is unenforceable. The Complainant was not provided with the costs of the recruitment fees prior to signing the contract and was unaware that the fees would amount to €7,000. The Complainant maintained that €7,000 in recruitment fees is excessive, has not been justified and is not fair or reasonable.  According to section 5 subsection 2(ii) of the 1991 Act any deduction must be fair and reasonable with regard to the circumstances including the wages of the employee.  We say that in effect and where the recruitment fees have not been substantiated, clause 20 is a penalty clause. The rule against contractual penalties is very well established and was set out over a century ago by the House of Lords in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79. A clause will be a penalty if it is not a genuine pre-estimate of the loss that could be proved to have followed from a breach of contract.

In the case of Homebond Technical Services Limited -v- Mr David Faulkner PW/21/61 ADJ-00030850 the Labour Court upheld the employee’s complaint in relation to an unlawful deduction of wages where wages were withheld from the employee as a reimbursement to the employer for the expense of course fees. While the facts of this case center around the applicability of a term in an employee handbook which was operative after the employee signed up to the course, the Court held that the “respondents relied on provisions in a handbook and in a contract , neither of which were specific enough to enable them to act as they did. As a result the complainant never agreed to the deductions concerned, had no way of knowing that the deductions would be made and entered into commitments without being in full possession of the facts.” The comments made by the Court in that case could easily be applied to the Complainant’s claim in this matter. The contractual clause is not specific enough to be relied upon and the Complainant was not in receipt of the specific and relevant facts at the time she entered into the contract with the Respondent.

In her complaint form, the Complainant alleges (i) an unlawful deduction was made from her wages in the amount of €7,000, and (ii) she was paid €9,980.73 less than the amount due to her. 

The Respondent denied the Complainant’s allegations in full.  The Complainant was advised in advance of and on commencement of her employment that her employment contract included a term that meant if she was to leave her position within 12 months recruitment fees incurred in respect of her recruitment and paid by the Respondent would be fully repayable by her. The Complainant was repeatedly reminded of this obligation in advance of resigning from her employment. Despite this, the Respondent proceeded to resign from her employment to take up another role.   The Respondent did not in fact make any deduction from the Complainant’s wages in respect of an over-payment of salary to her in the amount of €1,143.39. She retains the benefit of this over-payment. 

The Respondent is an independent pharmacy in Limerick.   In June 2020, due to a severe shortage of pharmacists in the Limerick area, the Respondent was required to recruit for an open position via a recruitment agency, Medpharm. Medpharm charged the Respondent a fee of €7,000 (exc. VAT) for its services in securing the recruitment of the Complainant. The Company paid this fee in five instalments between 25 September and 23 December 2020. Receipts were provided to the Hearing.

The Complainant was identified as a suitable candidate by Medpharm and was interviewed by Daire Scanlon and Louise Mulchahy of the Respondent on 8 June 2020. Terms of employment were discussed at this interview, including the requirement on the Complainant to repay recruitment fees to the Respondent if the Complainant left her employment within 12 months.  On 29 June, the Complainant successfully completed a trial day with the Respondent during which Louise Mulcahy (the Complainant’s Operations Manager) again reviewed details of the Complainant’s proposed employment contract with her, including the detail of Clause 20 which clearly stated that the recruitment fee incurred by the Respondent in respect of the Complainant’s recruitment would be repayable if the Complainant left her employment within 12 months of her commencement date (the “Recruitment Rebate”). The Respondent understood at this time that the Recruitment Rebate would amount to €9,000 and advised the Complainant of this, but the fee actually charged to the Respondent was reduced by Medpharm to €7,000 and ultimately this is the sum that the Respondent deducted from the Complainant’s pay. 

The Respondent initially interviewed for the role of Pharmacy Technician as she had not completed registration as a pharmacist with the Pharmaceutical Society of Ireland at that time. However, the Complainant’s formal registration was confirmed on 8 July 2020 which allowed her to commence employment as a pharmacist. 

On 10 July 2020 the Complainant was issued with a contract of employment via email from Louise Mulcahy. The Complainant commenced employment with the Respondent on 21 July 2020. The content of her employment contract (including the Recruitment Rebate at clause 20 and Set Off at Clause 24) was explained again to the Complainant on 21 July by Daire Scanlon. The Complainant was advised that the amount of the Recruitment Rebate would be €9,000. The Complainant advised the Respondent at this time that she wished to build a career with them and planned to stay a minimum of 24 months so she was happy for the Respondent to include the Recruitment Rebate clause in her contract as it was not going to arise. She signed the contract on 21 July 2020.

On 24 November 2020 it came to the attention of the Respondent that they had erroneously been over-paying the Complainant’s salary; the Respondent had been making salary payments to the Respondent based on a salary of €65,000, rather than her contractual salary of €60,000. The Complainant was advised by Louise Mulcahy on 24 November that the Respondent would “make arrangements with the Complainant for reimbursement to the company of the overpayment to date” and that she would “ask payroll to advise the total amount” of the reimbursement. 

The issue came to light because the Complainant had asked for a pay rise, which prompted the Respondent to check what she was being paid. The Complainant advised on 25 November 2020 that she had “no idea” that she was being overpaid and asked to be provided with the terms of the reimbursement she would have to make. The Complainant was given a commitment on 24 November 2020 that her salary would be reviewed early in 2021. Despite this commitment from the Respondent, on 7 December 2020, the Complainant advised the Respondent by email that she intended to resign to move to another pharmacy for a higher salary.

During December 2020 the Respondent made repeated efforts to retain the Complainant in its employment. She was offered a pay rise and a promotion to Supervising Pharmacist by Daire Scanlon. She was also advised that the overpayment of her salary would not need to be returned to the Company if she stayed and in fact, contrary to assertions by the Complainant, this over-payment has never been reclaimed by the Respondent. In addition, Louise Mulcahy met with the Complainant on two separate occasions to discuss “all her issues”.  Despite the efforts of the Respondent to encourage the Complainant to stay, the Complainant sent a text message to Ms Mulcahy on 22 December stating that “having thought about everything that was discussed previously” she was sticking to her decision to leave her employment because “I believe that for the point of my career as pharmacist it suits me best. After the Complainant confirmed her decision to leave the pharmacy, Louise Mulcahy sought to speak to the Complainant in person on multiple occasions regarding her obligation to repay the recruitment fee. However, the Complainant refused to engage with Ms Mulcahy on the topic and for that reason, on 25 January 2021, the Respondent wrote to the Complainant confirming that she had been over-paid in the amount of €1,143.39 and that she would be required to repay recruitment fees of €7,000. The Respondent confirmed that the Recruitment Rebate would be offset against the Complainant’s last salary payment and that a sum of €1,540.64 remained outstanding. Daire Scanlon also sought to engage the Complainant on this topic at this time and suggested to her that she might wish to spread the repayment over a 6-12 month period, but the Complainant again refused to discuss the matter. 

 The Respondent subsequently received legal correspondence on behalf of the Complainant from Tully Rinckey LLP on 1 February 2021 which disputed that the Complainant had any liability to repay either the overpayment of wages or the Recruitment Rebate.  The Respondent wrote to Tully Rinckey LLP on 5 February 2021 explaining the situation and again requesting a proposal from the Complainant regarding repayment of the sums due to the Respondent. Tully Rinckey LLP refused and repeated the threat to issue the within legal proceedings, which they subsequently filed on behalf of the Complainant. Ultimately, the Respondent waived the requirement for the Complainant to repay the overpayment of wages she received and in fact no deduction was ever made from her salary in this respect. As a result the Complainant has retained the benefit of this overpayment in the amount of €1,143.39. 

The Respondent deducted and remitted taxes of €3,568.99 from the gross amount of €9,028.35 due to the Complainant on termination of her employment (which comprised salary and holiday pay). That left a net sum payable to the Complainant of €5,459.36 (comprising salary and payment in lieu of annual leave). This sum was offset against the €7,000 Recruitment Rebate.  The Respondent advised the Complainant that a sum of €1,540.64 remained owing to it (being the balance of the €7,000 Recruitment Rebate), but the Respondent has not subsequently sought to enforce this debt.  

As a general point, the Complainant has failed to explain how in her first complaint she can claim that €7,000 was unlawfully deducted from her pay and in her second complaint claim that she is owed €9,980.73 due to the same deduction.   The Respondent submitted that it was fully entitled as a matter of contract law and statute to deduct the Recruitment Rebate from the Complainant’s salary and that it does not owe any further payment to the Complainant. Her claims are without merit. Clauses which require repayment of expenses incurred by employers in various circumstances are enforceable in Ireland. Subject to some exceptions, the Payment of Wages Act, 1991 generally allows for deductions from wages in circumstances where the deduction is specifically authorised by the employment contract (as it is here). Among other requirements under the Payments of Wages Act, the amount of any deduction must be fair and reasonable and no greater than the actual cost to the company. The employer must also give notice of the deduction. All of the legislative requirements for lawful deductions have been complied with by the Respondent in this case. We have highlighted the relevant contractual clauses and applicable legislation below: 

The Complainant’s contract of employment with the Respondent contained two express provisions which are of direct relevance to the Complainant’s complaints: 

Clause 20 – Recruitment Rebate “In the event of termination and to compensate the company for costs incurred towards your recruitment the following rebate will apply. Termination within 12 months = 100% of costs will be refunded.”  Clause 24 – Set Off  “The Company will be entitled to deduct from your salary any payments made to you in error or any sums that may become due by you to the Company. By signing this contract the employee hereby consents to any such deductions of sums due to the Company.” 

Penalty Clauses

The Respondent submitted it is clear from the above that the Respondent was perfectly entitled to deduct the Recruitment Rebate from the Complainant’s pay.  The Complainant’s submissions claim that Clause 20 of her employment contract relating to the Recruitment Rebate constituted a penalty clause. This was denied.  It was submitted that Clause 20 of the Complainant’s contract of employment relating to the Recruitment Rebate was not a penalty clause by any normal understanding of the phrase. Penalty clauses are ordinarily concerned with excessive payments (unrelated to any actual damage done as a result of a breach) to be made to one party in the event of a breach of contract by the other.   The test for whether a contractual provision could constitute a penalty clause was originally set out in the case of Dunlop Pneumatic Tyre Co Ltd v. New Garage and Motor Co Ltd [1914] UKHL 1, which established that at common law, any fine or deduction from an employee’s wages should be a genuine pre-estimate of the loss suffered by the employer as a result of that employee’s breach of contract. Anything in excess of that would be a penalty and void at common law. 

The leading modern case on penalty clauses is the UK Supreme Court decision of Cavendish Square Holding BV v Makdessi; Parking Eye Ltd v Beavis (Consumers' Association intervening) [2016] AC 1172. Our Supreme Court has not yet considered this development of the law, but is due to do so in the upcoming case of Sheehan -v- Breccia Irish Development Company & Ors.  In Cavendish, the test for a penalty clause was stated as:  “the true test [for a penalty clause] is whether the impugned provision is a secondary obligation which imposes a detriment on the contract breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter.” The difference between a primary and secondary contractual obligation is explained at paragraph 14 of Cavendish:  “where a contract contains an obligation on one party to perform an act, and also provides that, if he does not perform it, he will pay the other party a specified sum of money, the obligation to pay the specified sum is a secondary obligation which is capable of being a penalty; but if the contract does not  impose  (expressly  or  impliedly)  an  obligation  to  perform  the  act,  but  simply provides that, if one party does not perform, he will pay the other party a specified sum, the obligation to pay the specified sum is a conditional primary obligation and cannot be a penalty.”

It is submitted that Clause 20 in the Complainant’s contract of employment is a primary obligation upon the termination of employment and does not depend upon, and was not made in response to, any breach of contract by the Complainant. There was no breach of contract in this case because the Complainant lawfully terminated her contract by giving notice. Therefore clause 20 cannot possibly be defined as a penalty clause as it was not activated as a result of a breach of contract.

There is no obligation in her employment contract which requires the Complainant to perform an act in default of which she must pay a sum of money. The contract expressly permits the Complainant not to perform the act of remaining in work, by providing for termination on notice. The requirement to reimburse the Respondent for the costs relating to the Complainant’s recruitment falls into the second category described in paragraph 14 of Cavendish; that is if the Complainant does not perform the contract, by terminating the contract herself and giving notice, only then is she obliged to pay to the Respondent the Recruitment Rebate under clause 20.

The WRC has previously enforced clauses which require an employee to reimburse reasonable costs incurred by their employer where an employee leaves their employment within a period of time following their recruitment. The WRC has relied on an employer’s basic contractual right to enforce such clauses (as they are not penalty clauses), as well as the rights given to employers to make deductions in accordance with the requirements of the Payment of Wages Act 1991.  In this regard, we refer to the 2017 WRC determination Pre Registration Nurse -v- Nursing Home (CA -00012824-004) in which an employee unsuccessfully sought to label such a contractual obligation as a penalty clause. 

Specific Responses to Complainant’s Submissions

In the Complainant’s submissions, it was submitted that there is a “deficiency of clarity” in Clause 20, and that it is “ambiguous and is incapable of being enforced”. This was denied. In fact and as noted above, the meaning of the clause and the amount that would be payable under it was explained repeatedly to the Complainant by the Respondent. Clause 20 cannot be read in isolation and was included in the Complainant’s employment contract because the obvious intent was that the Complainant would repay the recruitment fees to the Company. It is disingenuous to suggest the Complainant was not fully aware of her obligations in this regard.  The Complainant’s submissions states that the Complainant had “significantly less bargaining power than the Respondent at the time the contract was signed”. This is patently false. The Respondent had severe difficulties recruiting pharmacists at that time and had resorted to availing of an expensive recruitment agency to source staff. The employment contract (including Clause 20) was explained in detail to the Complainant prior to her deciding to sign it. She had ample opportunity to object to the inclusion of Clause 20 and failed to do so. Indeed, the Complainant advised the Respondent at the time she was being recruited that she wished to build a career with them and planned to stay a minimum of 24 months so she was happy for the Respondent to include the Recruitment Rebate clause in her contract as it was not going to arise. The Complainant had no issue bargaining with the Respondent when it came to seeking a pay rise. 

At paragraphs 3.3 – 3.6 of the Complainant’s submissions, it is alleged that Clause 20 is “unconscionable” and €7,000 in recruitment fees is “excessive” and “not fair or reasonable”. The Respondent rejected these allegations. The Respondent asked the Complainant to repay no more than the actual cost it incurred in recruiting her via MedPharm. The Respondent was prepared to engage with the Complainant about the reimbursement and was open to a payment plan which would have spread the cost over a period of time. However, the Complainant herself completely refused to engage with the Respondent regarding the reimbursement and immediately instructed solicitors to object to any and all deductions from her pay. Neither the Complainant nor her solicitors engaged in a meaningful or constructive way to seek a reasonable timetable for repayment of the sums due to the Respondent and it is disingenuous to raise the fairness or otherwise of the deduction at this stage having made no efforts to ameliorate the situation for the Complainant previously.  

It is important to note that there is no obligation in the Payment of Wages Act to provide evidence to the employee of the costs incurred by the employer when making a deduction from pay. However, the relevant receipts for the €7,000 in recruitment fees paid by the Respondent in relation to the Complainant are provided.

The Complainant seeks to rely on the case of Homebond Technical Services Limited -v- Mr David Faulkner PW/21/61 ADJ-00030850 in support of an allegation that “the contractual clause [20] is not specific enough to be relied upon and the Complainant was not in receipt of the specific and relevant facts at the time she entered into the contract with the Respondent”.  This was denied.  The facts in Homebond vary significantly from the present case. The WRC concluded that Mr Faulkner “had no way of knowing that the deductions would be made”. The same cannot possibly be said for the Complainant. She was advised every step of the way from recruitment to when she reaffirmed her decision to resign that she would be required to repay an amount of €7,000 in recruitment fees incurred by the Respondent if she resigned within 12 months of commencing her employment. Unlike Homebond, the Respondent is not seeking to rely on an obscure clause buried somewhere in a handbook, nor to rely retrospectively on a new clause inserted into a revised handbook; the two clauses that the Respondent seeks to rely on to make the relevant deduction are included in the Complainant’s employment contract. The employment contract and the two specific clauses were explained in detail to the Complainant repeatedly. The Complainant was repeatedly advised that the Recruitment Rebate amounted to €7,000 and she made a decision to resign from her employment and take up a better remunerated role in another pharmacy well aware of all of this. 

We deal with both of the Complainant’s specific complaints below. 

Complaint 1: 

In her WRC complaint form, the Complainant alleges an unlawful deduction was made from her wages in the amount of €7,000 in respect of a “reclaimed recruitment fee”. The Complainant alleges that she was given no notice from her employer of their intent to make this deduction.  

As noted above, Clause 20 of the Respondent’s Contract refers to a Recruitment Rebate in the event her employment terminates within 12 months.  The Complainant’s assertion in her complaint form that she was not given any notice of the Respondent’s intent to make the Recruitment Rebate deduction is patently false and disingenuous. Aside from a clause to this effect being included in her contract of employment, she was specifically advised by the Respondent on multiple occasions (i) prior to her commencing employment, (ii) immediately prior to her signing her employment contract, and (iii) at the time of her decision to resign that she had a contractual obligation to repay the Recruitment Rebate of €7,000 if she left her employment within the first 12 months. 

Based on the contractual provisions, statute and case law set out above it is clear that the deduction made by the Respondent from the Complainant’s pay was lawful and the Complainant’s complaint in this regard should be dismissed. 

Complaint 2: 

The Complainant alleges that the Respondent has not paid her €9,980.73 that she is due.

This is denied.  We understand this sum purports to represent salary payments for December 2020 and January 2021, and holiday pay, which were processed via payroll but not received by the Complainant due to the deduction of taxes (the legitimacy of which does not appear to be in dispute) and the Recruitment Rebate (as discussed above). The same sum appeared in a letter received from Tully Rinckey on 1 February 2021.  The Respondent does not accept the Complainant’s assessment of the salary figures she claims she should have received, but it does accept her calculation of holiday pay. The Complainant’s payslip dated 31 January 2021 accurately reflects the remuneration payable to the Complainant on termination of her employment, being gross salary payments of €8,182.12 plus holiday pay of €846.23, totalling €9,028 (gross).  However, even if she is successful in arguing that the deduction of the Recruitment Rebate was unlawful (which is denied), the Complainant would never have received a sum of €9,028 as that gross amount was subject to tax which the Respondent is under a legal duty to deduct at source and which the Respondent in fact did deduct at source. The Respondent’s obligation to do so or the amount of tax actually deducted is not in dispute.  As such, if the Recruitment Rebate had not been deducted, the total net figure that would have been payable to the Complainant on termination of her employment would have been €5,459.  However, as noted above, the Complainant was advised by the Respondent on multiple occasions prior to her commencing employment, prior to her signing her employment contract and at the time of her decision to resign that she had a contractual obligation to repay €7,000 incurred by the Company in recruiting her (the Recruitment Rebate) if she left her employment within the first 12 months.  The Respondent duly offset the Recruitment Rebate (described as an “Agency Fee” in the Complainant’s final payslip) of €7,000 against the net amount of €5,459 which would otherwise have been payable to the Complainant on termination of her employment. As a result no payment was received by the Complainant on termination of her employment.  The Respondent submits that it was fully entitled as a matter of contract law and statute to deduct the Recruitment Fee from the Complainant’s final payment. The Complainant’s complaint in this regard should be dismissed.  There can be no question but that the Respondent was entitled to deduct the overpayment of salary, but it did not in fact make that deduction from the Complainant’s pay. Therefore, in the event that the Workplace Relations Commission finds against the Respondent as regards the lawfulness of the deduction of the Recruitment Rebate, any sum found to be owing to the Complainant (which is denied) should be reduced by the amount of the salary overpayment.

It is the Respondent’s position that it was clearly entitled as a matter of contract and under the Payment of Wages Acts to make the relevant deduction of €7,000 (in effect €5,459) from the Complainant’s final salary payment. As such, it is submitted that the Complainant’s complaints are without merit and must fail and the Adjudication Officer is respectfully requested to find as such.

Section 5 of the Payment of Wages Act 1991  provides that:

5.—(1) An employer shall not make a deduction from the wages of an employee (or receive any payment from an employee) unless—

(2) An employer shall not make a deduction from the wages of an employee in respect of-

(a)  an act or omission of the employee, or

(b)  any goods or services supplied to or provided for the employee by the employer the supply or provision of which is necessary to the employment,

Unless-

(i)             the deduction is required or authorized to be made by virtue of a term (whether express or implied and, if express, whether oral or in writing) of the contract of employment made between the employer and the employee, and

(ii)           the deduction is of an amount that is fair and reasonable having regard to all the circumstances (including the amount of the wages of the employee), and

(iii)         before the time of the act or omission or the provision of the goods or services, the employee has been furnished with -

(I)            in case the term referred to in subparagraph (i) is in writing, a copy thereof,

(II)          in any other case, notice in writing of the existence and effect of the term, and

(iv) in case the deduction is in respect of an act or omission of the employee, the employee, the employee has been furnished, at le

(I)  in case the term referred to in subparagraph (i) is in writing, acopy thereof,

(II)in any other case, notice in writing of the existence and effect of the term, and

(vi) in case the deduction is in respect of goods or services supplied or provided as aforesaid, the deduction is of an amount not exceeding the cost to the employer of the goods or services,

(3) (a) An employer shall not receive a payment from an employee in respect of a matter referred to in subsection (2) , unless, if the payment were a deduction , it could comply with that subsection.

(b) Where an employer receives a payment in accordance with paragraph (a) he shall forthwith give a receipt for the payment to the employee. “

Clause 6.2 of the Payment of Wages Act states “Where a rights commissioner decides, as respects a complaint under this section in relation to a deduction made by an employer from the wages of an employee or the receipt from an employee by an employer of a payment, that the complaint is well-founded in regard to the whole or a part of the deduction or payment, the commissioner shall order the employer to pay to the employee compensation of such amount (if any) as he thinks reasonable in the circumstances…” While I will analyse the legal arguments put forward by both Parties, particularly in relation to whether Clause 20 is a penalty clause/enforceable or not it is the word “reasonable” that will primarily guide my assessment and conclusion “to the whole or a part of the deduction” retained by the Respondent as it relates to Clause 20.

The first issue to address is what is contained by the wording in clause 20. Clause 20 of the employment contract states “In the event of termination and to compensate the company for costs incurred towards your recruitment the following rebate will apply. Termination within 12 months=100% of costs will be refunded.” The clause as written would imply it’s an obligation if either party terminate the contract but is not precise in a monetary sense and therefore, in pure contractual law terms is slightly deficient in that it does not spell out a “consideration”. While applying to both Parties the intent of Clause 20 is clear in that the primary obligation would rest with the Employee in this case The issue of what amount would be recoverable is not specifically contained in the contract, was an amount only known to the Respondent at the time of the contract being written and the Complainant was a “stranger” to the cost involved. Given the specific agency fee was not specified in the contract the question then arises as to what knowledge did the Complainant have to what she was agreeing to when signing the contract. This is where this case does not fully meet the Cavendish test as it does not set out a “specified sum”.  The Respondent argued that it informed the Complainant on a number of occasions the specific Recruitment Fee amount that would be repayable prior to the signing of the contract. Yet, despite their assertions in this regard they failed to specify the exact amount in the contract. The contract also states “costs incurred towards your recruitment… will be refunded”  but does not spell out what costs are intended to be refunded.  As written, Clause 20 could easily include a multitude of costs i.e. interviewer time cost, cost of room hire, postage, medical assessment etc. etc. The Respondent only sought to recover the recruitment fee of 7,000 Euros and no more and my reason for pointing this broader possibility is to show the generic nature of the clause.  In summary, Clause 20 is vague, has no monetary amount specified and the specific liability that the Complainant was entering into was not put into writing, and therefore leaving the possibility that the specific amount was unknown to her, when she accepted the contract and of course the specific Clause 20 term. This view is enhanced by the different amounts, 9000 versus 7000 Euros, of what the fee ended up being to the Agency.

The second issue is to assess whether clause 20 is a penalty clause or one for damages arising from the termination of the Complainants employment. While the issues in Cavendish are relevant a more relevant case lawis CleeveLink v E Bryla UKEAT/0440/12/BA . This is an appeal against the decision of an Employment Tribunal.  In coming to my findings I have decided to use a lot of the logic used in the Bryla case as relevant case law and quote extensively from it below for the benefit of the Parties.

Judge Hand QC stated  “ The principles enunciated in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 1979 and re-stated in Lordsvale Finance PLC v Bank of Zambia [1996] QB 752, Alfred McAlpine Capital Projects v Tilebox Ltd [2005] EWHC 281 TCC, [2005] BLR 271 and Murray v Leisureplay PLC [2005] EWCA Civ 963, [2005] IRLR 946 are relevant to the issue of unlawful deductions from wages, because if the sum is a penalty then its deduction cannot be lawful; guidance offered to Employment Tribunals on their application. Here the Employment Judge had struck down a recoupment of expenses provision as a penalty but on the wrong basis.  He did not address the position at the time the contract was entered into but at the time of breach. Moreover, he never considered whether there was an extravagant or unconscionable gulf that existed between the maximum amount that could be recovered in a common-law action for damages for breach of contract as opposed to the sum stipulated in the agreement.

The Employment Tribunal upheld claims in respect of unlawful deductions and untaken annual leave.  This appeal is concerned with the former.  The Judgment from which it is derived is Employment Judge Maxwell’s analysis of whether a particular clause in the contract between the Appellant employer and the Claimant, Ms Bryla, was a liquidated damages clause or an unenforceable penalty.  

There are two issues in this case raised by Mr Scott’s submissions.  The first is whether an Employment Tribunal should be concerned with such esoteric matters as to whether a clause in a contract is a penalty clause or a liquidated damages clause or whether, if the deduction comes within the parameters set by section 13 of Part II of the Employment Rights Act 1996, which I shall call “the Act”, the Employment Tribunal should simply accept that the deduction made pursuant to those parameters – that is to say, either by the contractual agreement or by a specific agreement – is a lawful deduction for the purposes of Part II of the Act.

The second issue is whether a clause in the contract, or in this case an agreement that is said to become part of the contract, is valid as a liquidated damages clause or unenforceable as a penalty.  That issue arises in a variety of contexts.  It is an issue frequently encountered in sale-of-goods contracts of the kind involved in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 1979.  The issue is often encountered in what might be described as financial or commercial contracts, of which the case of Lordsvale Finance PLC v Bank of Zambia [1996] QB 752 is a prime example.  As the case of Alfred McAlpine Capital Projects v Tilebox Ltd [2005] EWHC 281 TCC, [2005] BLR 271 illustrates, this issue also arises in construction contracts.  From time to time, the issue can occur in what might be broadly described as an employment context.  The case of Murray v Leisureplay PLC [2005] EWCA Civ 963, [2005] IRLR 946 provides an example of that.

As this appeal illustrates, the issue can arise in what might be described as a pure employment law context in litigation in the Employment Tribunal, but, as this appeal also illustrates, the subject of whether a particular clause is a penalty clause or a liquidated damages clause is by no means straightforward.  It is for that reason that I hope that some of what follows might be of assistance to Employment Tribunals generally.

By the Notice of Appeal two points arise: firstly, whether a matter of this kind falls within the ambit of section 13 of the Act; and secondly, whether or not the repayment agreement, which is at the heart of this case and which is to be found at page 1 of the appeal bundle, amounted to an unenforceable penalty or whether it was a liquidated damages clause.  A third potential issue arose as a result of a remark made by the then President, Underhill J, in the case of MBL UK Ltd v Quigley [2009] UKEAT/0061/08.  In the case of Quigley at paragraph 4 of his Judgment Underhill J said this:  

“Before I consider the grounds of appeal set out in the Notice of Appeal I should just say this about the Judge's reasoning.  With respect to him, I am not sure that the analysis in terms of ‘genuine pre-estimate of loss’ is correct.  That evokes a line of authorities about clauses which purport to liquidate future losses caused by a breach of contract. The £500 stipulated in the present case – as, NB, a maximum not a fixed sum – is to cover expenses incurred during the period of the employment and which will therefore have been incurred at the time that the clause operates.”

Mr Scott indicated that he did not wish to develop any arguments that this clause was neither a liquidated damages clause nor a penalty clause but something similar to the clause identified by Underhill J.  It seems at least possible that what the President had in mind was that if the clause amounts to the recoupment of expenses that have actually been incurred as opposed to the costs that might arise as a result of breach of the contract in the future, then considerations as to whether or not it is an unlawful penalty do not arise.  But because Mr Scott did not take the point that is an argument, which will have to be left for another day and so I am faced with two matters to decide.

The Claimant is a Polish national and was employed by the Respondent for a short period of about 12 weeks between 20 September 2011 and 13 December 2011.  She worked as a live-in care worker.  She had been recruited by a company in Poland called Miracles Recruitment, and as part of the contractual agreement between the Respondent and Miracles Recruitment the Respondent had paid what is called a standard candidate fee of £400.00 to Miracles Recruitment.  It had also paid the costs of the flight to bring the Respondent from Poland to the United Kingdom.

By the time that the agreement at page 1 of the appeal bundle is said to have been signed by the Claimant, quite a lot of the items of expenditure set out, in what is effectively an account, may well have already been incurred.  The Employment Tribunal found at paragraph 11 of the Judgment at page 6 that Ms Bryla had undergone training on 20, 21, 22 and 23 September and later on 26 September 2011.  It is impossible to know in what order the training was done and therefore precisely how much of it had been completed by the time she is said to have signed this agreement on 23 September 2011. I should pause at this point in narrating the facts to say this.  Ms Bryla in a cogent and clear series of points made to me took issue with the amount of transport costs or air fare costs, recruitment costs and training costs.  She also said that she had never signed the agreement and that the signature that appears at page 1 is not her signature; she had signed there a different document, which was only half a page long; she had never resigned, nor had she been dismissed; she had been very badly treated, having worked excessive hours with very difficult elderly people suffering from aggressive dementia; and she showed me her work schedule, which appeared to show that she had done 730 hours in a 28-day period.  I cannot of course know the extent to which any of her remarks about the work is correct.  I can imagine how difficult the work is, but the points that she made are simply all factual points, and, as I have tried to explain to her, my function in this Tribunal is to decide whether the Employment Judge made any error of law.  He specifically found that she had signed the agreement, and I anticipate that the submissions addressed to me about her not signing the agreement were addressed to Employment Judge Maxwell.  Nevertheless he found that she had been dismissed for misconduct and I cannot interfere with either of those findings.

The agreement itself, in the pertinent paragraph, reads as follows:

“If the employee’s employment is terminated as a result of the employee’s misconduct or at the employee’s own request within six months of their date of commencement, the employer reserves the right to recoup these costs in full from the employee.  This will normally be by deduction from the employees’ [sic] final pay or any other monies due to the employee.”  The subsequent paragraph deals with a sliding scale, whereby after six months, for each month of completed employment, the costs reduce by one-sixth.  As the Employment Judge found, on 13 December 2011, after a disagreement about her work roster, the Claimant was dismissed summarily by the Respondent on the alleged ground of gross misconduct.  As I have just sought to explain that is a finding I cannot go behind.  At that time she was entitled to £1,203.35 on account of unpaid wages.  I have seen the computation; Ms Bryla showed it to me.  She disagrees with it, but, again, that is a finding of fact that I cannot go behind.  The recruitment costs and so forth were then deducted from the amount owed to her with the result that she was not paid anything.

Before the Employment Tribunal Ms Bryla alleged that the deduction of that amount of money represented an unlawful deduction from her wages as provided for by section 13(1) of the Act.

The Employment Tribunal found that the repayment agreement was a written agreement and thus capable of satisfying the requirements in section 13(1)(b) of the Act.  Mr Scott’s first point was that the Employment Tribunal should not concern itself with anything more than whether the contractual agreement fitted the parameters set out at section 13.  The Employment Judge at paragraph 33 analysed this matter as a section 13(1)(b) case; he could equally, in my judgment, have analysed it as a 13(1)(a) case.  Indeed, it could be said to be both; it matters not.  Mr Scott’s argument is that the Employment Tribunal is not concerned with whether the sum might be unenforceable.  That is a matter that is the province of the civil courts, namely the County Court and the High Court.  All that the Employment Judge is concerned with is the statutory rubric of section 13 and that once it is established that the agreement for the deduction falls within either subparagraph (a) or subparagraph (b) then that is the end of the matter under the statutory jurisdiction.

I do not agree.  It seems to me that the deduction contemplated by the contract must be a lawful deduction.  If it is a penalty clause, it is not a lawful deduction, and I cannot accept Mr Scott’s argument that it is not within the province of the Employment Tribunal to decide this matter.  This is no different to a number of other aspects of a contract of employment that fall to be considered, construed and adjudicated upon in the context of the statutory jurisdiction.  Employment Tribunals, for instance, have to spend a great deal of time deciding whether somebody is employed under a contract of service or a contract for services; that is a matter of construction of the contract as well as the application of common-law principles.  Quite frequently in that context and in other contexts issues of illegality and so-called sham contracts arise.  The Employment Tribunal has to decide upon those issues.  This issue, in my judgment, is no different.

Mr Scott then turned to the second point in the issue of whether or not this was a penalty clause.  The law has been restated at page 762G of the Lordsvale case by Colman J.  That is referred to at paragraphs 26-172 at pages 1,865-1,866 of Volume I of Chitty on Contracts in the

31st edition and has been approved by the Court of Appeal in Murray and Euro London Appointments Ltd v Claessens International Ltd [2006] EWCA Civ 385, [2006] 2 LR 286. 

In the course of argument I referred to paragraph 762G of Lordsvale:  

“The speeches in Dunlop Pneumatic Tyre Co. Ltd v New Garage and Motor Co. Ltd [1915] A.C. 79 show that whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if breach occurred. Thus the presumption of penalty arises where "a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage ... " which is a citation of the speech of Lord Watson in Lord Elphinstone v. Monkland Iron and Coal Co. Ltd (1886) 11 App Cas 332. 342..”

There was also reference to 763G-764A: “It is perfectly true that for upwards of a century the courts have been at pains to define penalties by means of distinguishing them for liquidated damages clauses. The question that has always had to be addressed is therefore whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss. That is because the payment of liquidated damages is the most prevalent purpose for which an additional payment on breach might be required under a contract. However, the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach.” 

This restatement by Colman J re-emphasises that the issue as to whether a particular clause in a contract is unenforceable as a penalty or valid as a genuine pre-estimate of damage is one of construction of the provision with the objective of discerning whether, when the contract was entered into, the predominant purpose of the provision was to deter breach or compensate for it (see page 762G, quoted above).  This derives from Lord Dunedin’s famous speech in Dunlop, and it seems to me to be the appropriate starting point for any discussion of the issue.  Of course, all matters of construction of contracts have to be approached from the contextual standpoint identified by Hoffmann LJ in the well-known five-page summary of the principles of construction of contracts in Investors Compensation Scheme v West Bromwich Building Society [1997] UKHL 28.

Mr Scott submits that the Employment Tribunal should have looked at the repayment agreement at the time the contract was entered into from the perspective of what was commercially justifiable at the time the contract was entered into and not from the standpoint of the particular facts of the particular breach.  In the course of argument I mentioned paragraph 43 of the Judgment of Arden LJ in Murray: “The usual way of expressing the conclusion that a contractual provision does not impose a penalty is by stating that the provision for the payment of money in the event of breach was a genuine pre-estimate by the parties to the agreement of the damage the innocent party would suffer in the event of breach.  As Lord Dunedin said in the Dunlop case, the ‘essence’ of a liquidated damages clause is ‘a genuine covenanted pre-estimate of damage’ (at page 86).  As the Dunlop case and the citation from the Philips case (in the Cine case) show, a contractual provision does not become a penalty simply because the clause in question results in overpayment in particular circumstances.  The parties are allowed a generous margin.”

This is reinforced by paragraph 51:  

“However in the normal situation, the test will be whether or not the parties genuinely preestimated the loss that would occur on breach.  This is a relatively low level of review: see paragraphs 44 and 45 above.  I agree with Mr Bannister that the parties do not have to make an accurate assessment of the damages that would have been awarded at common law. Indeed it may be very difficult for them to do so.  That will frequently be the case in an employment contract. In ascertaining whether the parties have made a genuine pre-estimate of the damage, the court will consider the reasons which the parties had for agreeing to the clause in question at the time when the agreement was made.”

Arden LJ had distilled what she regarded as the essence of the judgment of the Court of

Appeal in Cine Bes Filmcilik Ve Yapimcilik and Anor v United International Pictures and Ors [2003] EWCA Civ 1169 at paragraph 42 of her Judgment and adopted it.  She summarised her approach at paragraph 54 and set out five propositions, to which she added that the issue was not to be considered from the point of view of good faith but that of reasonableness.

That was echoed in the judgment of Jackson J in Tilebox at paragraphs 47 and 48:

In addition to the authorities which I have mentioned, counsel have also drawn my attention to the relevant passages in Chitty on Contracts (29th edition) and Hudson's Building and Engineering Contracts (11th edition).  At paragraph 10-021 of Hudson, the editor states:

‘It may be a consequence of producer influence, but there would appear in fact to be virtually no reported cases in the United Kingdom where periodical liquidated damages for delay in building contracts have been held excessive so as to constitute a penalty.  Liquidated damages clauses in general are not looked on with the same disfavour at the present day, and modern disallowances seem to arise almost entirely in the field of hire-purchase where Lord Dunedin's principle 4(c) above has frequently been violated.’

Let me now stand back from the authorities and make four general observations, which are pertinent to the issues in the present case.

There seem to be two strands in the authorities.  In some cases judges consider whether there is an unconscionable or extravagant disproportion between the damages stipulated in the contract and the true amount of damages likely to be suffered.  In other cases the courts consider whether the level of damages stipulated was reasonable.  Mr Darling submits, and I accept, that these two strands can be reconciled.  In my view, a pre-estimate of damages does not have to be right in order to be reasonable.  There must be a substantial discrepancy between the level of damages stipulated in the contract and the level of damages which is likely to be suffered before it can be said that the agreed pre-estimate is unreasonable.

Although many authorities use or echo the phrase ‘genuine pre-estimate’, the test does not turn upon the genuineness or honesty of the party or parties who made the pre-estimate.  The test is primarily an objective one, even though the court has some regard to the thought processes of the parties at the time of contracting.

Because the rule about penalties is an anomaly within the law of contract, the courts are predisposed, where possible, to uphold contractual terms which fix the level of damages for breach.  This predisposition is even stronger in the case of commercial contracts freely entered into between parties of comparable bargaining power.

Looking at the bundle of authorities provided in this case, I note only four cases where the relevant clause has been struck down as a penalty. These are Commissioner of Public Works v Hills [1906] AC 368, Bridge v Campbell Discount Co Limited [1962] AC 600, Workers Trust and Merchant Bank Limited v Dojap Investments Limited [1993] AC 573, and Ariston SRL v Charly Records (Court of Appeal 13th March 1990).  In each of these four cases there was, in fact, a very wide gulf between (a) the level of damages likely to be suffered, and (b) the level of damages stipulated in the contract.”

Then, at paragraph 54 of her judgment in Murray Arden LJ reduced what she had said to  five propositions:  “With the benefit of the citation of authority given above, in my judgment, the following (with the explanation given below) constitutes a practical step by step guide as to the questions which the court should ask in a case like this:-

i)  To what breaches of contract does the contractual damages provision apply? ii)  What amount is payable on breach under that clause in the parties' agreement?

iii)  What amount would be payable if a claim for damages for breach of contract was brought under common law? iv) What were the parties' reasons for agreeing for the relevant clause?

v) Has the party who seeks to establish that the clause is a penalty shown that the amount payable under the clause was imposed in terrorem, or that it does not constitute a genuine preestimate of loss for the purposes of the Dunlop case, and, if he has shown the latter, is there some other reason which justifies the discrepancy between i) and ii) above?”

In one respect, Buxton LJ took a somewhat broader view than had Arden LJ.  Clarke LJ agreed with Buxton LJ, and so the judgment of Arden LJ might be characterised as a minority judgment.  The scope of the difference covers paragraphs 108-115 of the Judgment in Murray, and it would certainly be wearisome to the reader were I to quote the whole of it.  The essence can be gathered from paragraphs 110 and 111 and, I think, from the last three sentences of 113 and the first sentence of 114:

“110. That insight requires a recasting in more modern terms of the classic test set out by Lord Dunedin in Dunlop [1915] AC at p86:

‘The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted preestimate of damage’

That recasting is to be found in the judgment of Colman J in [Lordsvale] at 762G, a passage cited with approval by Mance LJ in paragraph 13 of his judgment in the Cine case […]:

‘whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for the breach.  That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if the breach occurred.’

111. It is important to note that the two alternatives, a deterrent penalty; or a genuine preestimate of loss; are indeed alternatives, with no middle ground between them.  Accordingly, if the court cannot say with some confidence that the clause is indeed intended as a deterrent, it appears to be forced back upon finding it to be a genuine pre-estimate of loss.  That choice illuminates the meaning of the latter phrase.  ‘Genuine’ in this context does not mean ‘honest’; and much less, as the argument before us at one stage suggested, that the sum stipulated must be in fact an accurate statement of the loss. Rather, the expression merely underlines the requirement that the clause should be compensatory rather than deterrent.  […]

[…] That also, in my view, is as far as this court went in the Cine case itself. That was a summary judgment case, involving no more than the identification of a triable issue: I would draw attention in that connexion to the observations of Thomas LJ in his paragraph [50] and of Peter Gibson LJ in his paragraph [54]. The approach that should be applied at trial would be in more general terms than that suggested by my Lady in her paragraph 42, that always requires a comparison between the liquidated and the common law damages to see if the comparison discloses a discrepancy; and then requires that discrepancy to be justified as a genuine pre-estimate of damages, or by some other form of justification.

I venture to disagree with that approach because it introduces a rigid and inflexible element into what should be a broad and general question.  […]”

This to my mind is a matter of emphasis rather than stark disagreement.  Arden LJ was regarded by Buxton LJ as having come to what might be thought to be a narrow-computing approach to the issue by contrasting damages payable on breach and the damages stipulated by the contract.  Buxton LJ took the view that this alone could not resolve the issue; his anxiety was that it would impose too detailed and too inflexible a constraint on what he regarded as essentially a broad and general question facing the Court.  I think that it is easy enough to pull all the judgments together.  Buxton LJ’s difficulty was that on his reading of Arden LJ’s judgment he regarded it as concentrating too much on the factual difference between the liquidated and the contractual damages.  In fact, Arden LJ, in the fifth point of her summary, had referred to the need to consider whether the amount had been imposed in terrorem, and it might not be fair to regard her as focusing exclusively on the mathematical difference. But this is not the place in which to attempt any more detailed reconciliation of their views.  Suffice it to say that in a broad approach whether or not a provision is intended to be deterrent can be considered by contrasting, amongst other things, the difference between the sum stipulated and the most that would be likely to awarded by way of damages for breach and what it comes down to, in my judgment, is that all the circumstances are grist to the mill when it comes to construing whether a stipulated clause amounts to a genuine pre-estimate or a penalty.

So things to be borne in mind are, firstly the contract falls to be construed at the time it was entered into.  Secondly, it falls to be construed on an objective basis; the issues of genuineness and honesty of the parties are not a relevant consideration.  Thirdly, the issue, broadly put, is deterrence or genuine pre-estimate but it can involve a question of comparison to be resolved by deciding whether the difference between the amount that could be recovered for loss of breach of contract and the amount stipulated in the contract as a fixed sum is so extravagantly wide of the mark – or, putting it another way, the gulf between them is so great – that is cannot be explained on any other basis than that it is a penalty to deter breach.

In my judgment, in this case the Employment Judge misdirected himself.  He did not address the position at the time the contract was entered into.  He looked at the matter as is illustrated by paragraphs 33 and 34 of his judgment at the time of breach.  Moreover, he never considered whether there was an extravagant or unconscionable gulf that existed between the maximum amount that could be recovered in a common-law action for damages for breach of contract as opposed to the sum stipulated in the agreement.

Ironically, as Mr Scott has pointed out, he had in fact himself answered these questions in paragraphs 33 and 34 of the judgment.  I accept Mr Scott’s submission that had he directed himself correctly, his own findings must have led him to the conclusion that this was a liquidated damages clause and that there was a relationship between the amounts and the maximum loss that could be incurred.  Employment Judge Maxwell put it himself in these terms:

“If the claimant had resigned the day after her training completed, then the figures would represent the loss to the respondent […].”

Indeed, that is mathematically correct and illustrates that the maximum loss was reflected by the amounts stated in the repayment agreement at page 1.  In those circumstances, it seems to me that not only has the learned Judge misdirected himself but that the answer is so clear that rather than remit the matter to the Employment Tribunal I should substitute my own judgment for that of the Employment Tribunal.  I have all the findings of fact that are necessary, and I have come to the conclusion that this was a liquidated damages clause.  The Judge should not have awarded any money to Ms Bryla, and therefore I shall substitute for his finding of penalty that the deduction was a genuine pre-estimate of loss and therefore lawful both at common law and under the Act.”  End of Case Law Extract

What differs significantly in this complaint to the above case is that the amount of refundable costs are not specified in the contract and the Complainant alleges she was not informed of the amount that would be refundable if she terminated her employment within 12 months.  The case that it was a penalty clause, while well argued, suffers based on the Bryla case law.   In conclusion, Clause 20 is a clause for damages recoverable if the contract is terminated and not a clause for breach of contract and my findings are that the term contained in Clause 20  is lawful and not a penalty clause but one for liquidated, but unspecific, damages . Given it does not include a specific monetary amount (or maximum) of the costs recoverable and the Complainant was a “stranger” to the amount involved raises a question mark about its full “lawfulness” as a contractual term of the contract.

The key issue is, was as per section 5.2 of the Act, the deduction of 7,000 Euros “the deduction is of an amount that is fair and reasonable having regard to all the circumstances”.

As Adjudicator my role is to assess the overall situation with the benefit of hindsight and precedent case law analysis. My conclusion is the recruitment rebate deduction was lawful and not a penalty clause but on careful assessment of all the facts and case law I determine that the fair and reasonable deduction for the recruitment rebate “having regard to all the circumstances” would be approximately half of that deducted by the Respondent.  In effect both parties share the responsibility for the “unclear” situation they found themselves in regarding Clause 20.  Clause 24 clearly allows for the Respondent to “deduct from your salary any payments made to you in error or any sums that may become due by you to the Company” so that particular issue in the Homebond case is not applicable in this case. I also conclude that the overpayment of wages from 65,000 to 60,000 was legally deductible under the Act, due to an overpayment, from the Complainants final wage and indeed this was accepted by the Complainant in legal correspondence prior to her Representative coming on record.

Having considered the combined effect of all of the above I find the Complaint number CA-00044545-001 well founded and have concluded that the Complainant is entitled to compensation of a total of 2.750 Euros in full and final settlement of Complaint number CA-00044545-001. This amount is a reflection of the shared responsibility both Parties have for the lack of clarity in the contract regarding Clause 20 and reflects a balance between the net funds claimed by the Complainant and those retained by the Respondent. For clarity, no other payment of any outstanding wages or holiday pay is payable to the Complainant.

I find that Complaint number CA-00044545-002 is not well founded as the deductions of the overpayment of wages was legal under the Act.