Caleys Ltd v Deadman

Caleys Ltd hired Teina Deadman as a sales and business development representative. The employment agreement required one month's notice of resignation or, failing that, forfeiture of a month's wages. Ms Deadman, who had a pre-existing health condition, found the role stressful and unsuitable. After a recurrence of vertigo, she resigned with only one day's notice.

Caleys deducted $1,303.85 from her final pay, relying on the forfeiture clause. The Employment Relations Authority found the clause unenforceable as a penalty, not a genuine estimate of loss. Caleys challenged this in the Employment Court, seeking to recover the deducted amount. The Court examined the employment relationship, the circumstances of Ms Deadman's resignation, and the legality of the wage deduction.

The Court also considered the broader context: Ms Deadman had been self-employed for seven years prior, and the role at Caleys was demanding, with a busy and noisy office environment. Despite her experience in the industry, she struggled with the systems and felt micromanaged. After two days of unpaid sick leave due to vertigo, she decided the job was not suitable and resigned. The company felt a strong sense of injustice at her leaving so promptly, but the Court focused on whether the wage deduction was lawful.

The Employment Court upheld the Authority’s decision that the forfeiture clause was unenforceable. The clause was considered a penalty because it was designed to compel the employee to serve out the notice period, not to compensate the employer for actual loss. The deduction from Ms Deadman’s final pay was therefore unlawful under the Wages Protection Act, as it was not authorised by law or by the employee after proper consultation.

The Court also noted that employers have other remedies, such as claiming damages for breach of contract or seeking penalties under the Employment Relations Act, but Caleys had not pursued these options. The deduction had to be repaid to Ms Deadman. Both parties were self-represented, and no costs were awarded. The Court emphasised that deductions from wages must be lawful, and that employees have the right to challenge unlawful deductions through the Employment Relations Authority.

Importantly, the Court recognised that while employers may feel aggrieved when employees leave abruptly, the law does not permit them to simply deduct wages unless the deduction is genuinely linked to actual loss and is properly consulted on. The judgment provides a clear warning against using penalty-based forfeiture clauses in employment agreements.

If your employment agreements include notice or forfeiture clauses, review them to ensure they are not simply penalties for failing to give notice. The clause must reflect a genuine pre-estimate of the loss your business would suffer if an employee leaves without notice. Blanket deductions are unlikely to be enforceable.

Before making any deductions from an employee’s pay, consult with the employee and ensure the deduction is lawful under the Wages Protection Act. If an employee leaves without notice, consider whether you have suffered actual loss and whether you can claim damages or penalties through the proper legal process.

For example, if an employee’s sudden departure causes you to lose a major client or incur extra recruitment costs, you may be able to claim actual damages, but you cannot simply deduct wages unless the employee agrees and the deduction is lawful. Always keep clear records of any consultation and agreement regarding deductions.

Employers should take the following steps to avoid legal pitfalls when employees resign without notice:

• Review all employment agreements for clauses that may be considered penalties.
• If you wish to include a forfeiture clause, ensure it is based on a reasonable estimate of actual loss, not just a deterrent.
• Before making any wage deduction, consult with the employee and obtain written agreement where required.
• Keep clear records of all communications and agreements regarding notice and deductions.
• If you believe you have suffered loss, seek advice on claiming damages or penalties through the correct legal process.

For HR managers and payroll officers, it’s important to understand that deductions from wages must comply with the Wages Protection Act. Unlawful deductions can lead to claims in the Employment Relations Authority and reputational risk for your business.

The Wages Protection Act 1983 prohibits employers from making deductions from wages unless authorised by law, by the employment agreement, or with the employee’s written consent after consultation. The Employment Relations Act 2000 allows employers to claim damages or penalties for breach of contract, but these must be pursued through the Authority or Court, not by unilateral deduction.

Employees have the right to challenge unlawful deductions and seek repayment through the Employment Relations Authority. Employers must act fairly and transparently, and ensure all contractual terms comply with employment law. Forfeiture clauses that operate as penalties are likely to be struck down by the Court. If you are unsure about the enforceability of a clause or the legality of a deduction, seek professional advice before taking action.

This case is a reminder that employment agreements should be carefully drafted and regularly reviewed to ensure compliance with current law. Both employers and employees should understand their rights and obligations regarding notice periods, wage deductions, and remedies for breach of contract.