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Case law: Tribunal considers whether 'bad leaver' provisions are an unenforceable penalty, unconscionable or an unlawful deduction from wages

Employers with, or considering including bad leaver provisions in their articles or a share purchase agreement should consider whether they could amount to an unenforceable penalty, or be unconscionable or an unlawful deduction from wages.

April 2019

This update was published in Legal Alert - April 2019

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

An employee held a 2% shareholding in her new employer. She had been given them when her employer acquired her old employer. Under a share purchase agreement and the company's articles of association, an employee who left the company in circumstances that made them a 'bad leaver' had to offer their shares back to the other shareholders at a discounted price. Employees who resigned voluntarily were within the definition of a bad leaver.

The employee resigned voluntarily and was forced to transfer her shares but she only received £143 for them. She claimed that:

  • the bad leaver provisions amounted to a penalty and were therefore unenforceable;
  • the provisions should be set aside as they were unconscionable;
  • the provisions amounted to an unlawful deduction from wages.

The legal test of whether a clause is a penalty is if it imposes financial consequences for the breach of a primary obligation in a contract, causing a detriment to the party committing the breach that is disproportionate to the other party's interest in the performance of that primary obligation.

The Employment Appeal Tribunal defined a penalty as a sum or remedy stipulated as a consequence of a breach of contract, but found that the remedy in this case - the requirement to transfer shares at a discounted value - was triggered because the employee's voluntary resignation set in motion consequential provisions in the articles of association. They were not a consequence of a breach of contract.

It also ruled that the agreement was not unconscionable. There was no serious disadvantage arising from poverty, ignorance, lack of advice or otherwise, which left the employee vulnerable to unfair disadvantage.

Nor were the bad leaver provisions an unlawful deduction from wages because the definition of 'wages' for this purpose expressly excludes ‘any payment to the worker otherwise than in [the worker's] capacity as a worker’. Here, the money received by the employee was because she was selling her shares, not for work she had done.

Operative date

  • Now

Recommendation

  • Employers with, or considering including bad leaver provisions in their articles or a share purchase agreement should consider whether they could amount to an unenforceable penalty, or be unconscionable or an unlawful deduction from wages, depending on the circumstances.

Case ref: Nosworthy v Instinctif UKEAT/0100/18/RN

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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