Case Report: Yizhen Li v First Marine Solutions and another

In the recent case of Yizhen Li v First Marine Solutions and another the Employment Appeal Tribunal (EAT) considered whether a clause deducting a month’s salary for an employee’s failure to work their notice period was a penalty clause.

Miss Li was employed by First Marine Solutions (FMS) as an engineer. When a dispute arose between Miss Li and FMS, Miss Li resigned and claimed constructive dismissal.  Miss Li’s employment contract entitled FMS to deduct a month’s salary if Miss Li failed to work her notice period. Miss Li refused to work her notice period as she believed that she had sufficient holiday outstanding. However, FMS argued that Miss Li did not. Therefore, FMS deducted one month’s salary for the shortfall of her notice period.

The law states that unless a clause in an employment contract providing for liquidated damages reflects a genuine pre-estimate of the employer’s losses, the clause may be unenforceable for being a penalty (Murray v Leisureplay plc). In this case, the Tribunal had to decide whether the clause was a penalty and therefore unenforceable.  The tribunal had ruled that the clause was not a penalty but was a genuine pre-estimate of loss and as a result was enforceable. The EAT upheld this decision.

This case is a useful reminder of the test for a penalty clause. However, the EAT made the point that such a clause would not usually be intended to operate in this way and should “better represent the realities of the workplace”. The EAT did not want this case to set an unfortunate precedent.