“An employee has resigned without working out their contractual notice. Can I withhold any pay in lieu of holiday accrued but not taken on termination, or deduct from the payment in lieu of holiday the reasonable costs to us of the employee’s breach of contract?”

Under section 27(1) of the Employment Rights Act 1996 (ERA 1996), wages means any sums payable to an employee in connection with their employment, including (among other things) holiday pay, whether statutory or contractual.

Under ERA 1996, s 13, an employer cannot make any deductions from the wages of an employee unless:

  • the deduction is required or authorised to be made by virtue of a statutory provision, e.g. the requirement to make deductions for income tax or National Insurance contributions via Pay As You Earn (PAYE)
  • the deduction is required or authorised to be made by virtue of a relevant provision of the employee’s contract, e.g. where the employer provides a loan to the employee and has a contractual right to take money out of the worker’s wages in repayment, or
  • the employee has previously signified in writing their agreement or consent to the deduction (e.g. in respect of pension contributions)

An employer may seek to hold the employee liable in damages for breach of contract, e.g. where the employee has failed or refused to perform the contract of employment by failing to work their contractual notice period.

In order to make a deduction in these circumstances, the company will need to have a clause in the contract of employment that specifically authorises the company to make a deduction from wages in this type of situation.

Consideration needs to be given to whether a contractual term allowing the employer to deduct a sum from the employee’s final pay (or requiring them to pay a sum to the employer) amounts to a liquidated damages clause (which is potentially enforceable) or an unenforceable penalty. The essence of a liquidated damages clause is that it is a genuine, agreed pre-estimate of the loss likely to be sustained in the event of a breach of contract. Such a clause may provide for a stipulated sum to be paid. By contrast, there is a common law rule that a court will refuse to enforce a contractual term which has the character of a ‘penalty’. A ‘penalty’, put broadly, is a term that is designed to punish a failure to abide by the contract’s terms.

As always, this advice is general in nature and will need to be tailored to any one particular situation. As an RMI member you have access to the RMI Legal advice line, as well as a number of industry experts for your assistance. Should you find yourself in the situation above, contact us at any stage for advice and assistance as appropriate.

Motor Industry Legal Services

Motor Industry Legal Services (MILS Solicitors) provides fully comprehensive legal advice and representation to UK motor retailers for one annual fee. It is the only law firm in the UK which specialises in motor law and motor trade law. MILS currently advises over 1,000 individual businesses within the sector as well as the Retail Motor Industry Federation (RMI) and its members.