Cleeve Link Ltd v Bryla

A deduction authorised by an employment contract must still be lawful. An Employment Tribunal therefore has jurisdiction to decide whether a contractual repayment provision is an unenforceable penalty.

The provision must be construed objectively as at the date of contracting. The central question is whether its predominant function is deterrence or compensation. A comparison between the stipulated sum and the loss recoverable at common law may be relevant. A penalty may be identified where there is an extravagant or unconscionable gulf which cannot reasonably be explained on a compensatory basis.

An employee claimed that her employer had unlawfully deducted recruitment, travel and training costs from unpaid wages following her summary dismissal for alleged misconduct. The Employment Tribunal held that the written repayment agreement fell within section 13 of the Employment Rights Act 1996, but concluded that it was an unenforceable penalty because it did not reflect the benefit obtained from the employee’s service.

The employer appealed. The issues were whether the Employment Tribunal could determine the penalty question and whether the repayment provision was a valid liquidated damages clause or an unenforceable penalty.

1. Jurisdiction. The Employment Tribunal was entitled, and required, to determine whether the contractual deduction was lawful. A deduction authorised under section 13 of the Employment Rights Act 1996 cannot be lawful if the contractual provision is an unenforceable penalty.
2. Applicable principles. The approach in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, as restated in Lordsvale Finance PLC v Bank of Zambia [1996] QB 752, was applicable. The provision had to be construed objectively at the time the contract was made. The issue was whether its predominant contractual function was to deter breach or compensate for it. The parties’ honesty or subjective genuineness was not determinative.
3. The difference between the contractual sum and the maximum damages recoverable at common law could be considered as part of the broader assessment. A substantial, extravagant or unconscionable gulf might indicate a penalty, but the inquiry was not a rigid mathematical exercise. All the circumstances were relevant.
4. The Employment Judge had directed himself incorrectly by assessing the provision at the time of breach rather than at the time of contracting. He had also failed to consider whether there was an extravagant or unconscionable gulf between the stipulated amount and the recoverable loss.
5. The findings of fact nevertheless showed that the maximum stipulated amount corresponded to the employer’s maximum loss if the employee left immediately after training. The provision was therefore a liquidated damages clause and not a penalty. The appeal was allowed and the finding that the deduction was unlawful was substituted with a finding that it was lawful at common law and under the Act.

• Employment Tribunal: Employment Judge Maxwell upheld the unlawful deduction claim, holding that the repayment agreement was an unenforceable penalty.
• Employment Appeal Tribunal: The appeal was allowed. The EAT substituted its own decision because the necessary findings of fact had been made.