In the case of Nosworthy v Instinctif Partners Limited EAT/0100/18/RN, the Employment Appeal Tribunal (the ‘EAT”) held that the Employment Tribunal (the ‘ET’) had been correct in dismissing the claims made by an employee who had lost the right to receive cash payment, loan notes and new shares in her employer when she voluntarily resigned from her employer.
The Facts in Nosworthy v Instinctif Partners Limited
Miss Nosworthy (the ‘Claimant’) was given a 2% shareholding in her employer, Communications Operations Limited, which was then sold with the rest of the company’s shares when it was acquired by Instinctif Partners (the ‘Respondent’). As a result, the Claimant was entitled to deferred payment for part of her shares under a three year ‘earn-out’ scheme in the Share Purchase Agreement which provided for her to receive cash payments, loan notes and new shares in the Respondent.
These arrangements served as a mechanism by the Respondent to incentivise retention of key employees. Bad leaver provisions meant the Claimant received £143 for her shares and forfeited loan notes when she voluntarily resigned in 2016 as she lost their entitlement to earn-out payments and had to sell her loan notes and new shares back to the Respondent at their acquisition cost.
The decision of the Employment Tribunal
The Claimant brought a claim in the Employment Tribunal and challenged the bad leaver provisions on three grounds:
- that they were “unconscionable” and therefore unenforceable
- that they amounted to an unlawful penalty clause
- that they amounted to an unlawful deduction from her wage
All arguments raised by the Claimant were rejected by the Employment Tribunal and she went on to appeal the decision in the Employment Appeal Tribunal.
The decision of the Employment Appeal Tribunal
Here the EAT reminded itself that this required that “one party has to have been disadvantaged in some relevant way as regards the other party, that other party must have exploited that disadvantage in some morally culpable manner, and the resulting transaction must be overreaching and oppressive”. It held that there was no evidence of serious disadvantage whether through poverty, or ignorance or lack of advice (the Claimant had confirmed she had received legal advice on the agreement at the time of entering into them). The first ground of appeal therefore failed.
Unlawful Penalty Clause
The EAT was also unconvinced by the argument that such provisions were an unlawful penalty clause. A penalty clause relates to damages for breach of contract which are purely a deterrent against a breach rather than a genuine pre-estimate of loss. Penalty clauses are generally unenforceable. Thus, a penalty has to operate on a breach of contract. The investment agreement, to which the Claimant was a party, contained a covenant that she would not become a bad leaver (as defined in the Articles of Association). Whilst it was acknowledged that the Claimant had breached the investment agreement, the Respondent was not relying on this breach to enforce the bad leaver provisions; it was simply applying the standalone rules set out in its Articles of Association. Therefore, the issue of penalties was not relevant in this case.
Unlawful Deduction from Wages
Finally, the EAT held that this could not amount to an unlawful deduction from wages under section 27(2)(e) of the Employment Rights Act 1996. Whilst the claim in respect of earn-out shares and loan notes could be said to be payable in connection with employment, they were deferred consideration for the sale of her shares and therefore provided to the Claimant as a vendor of shares, not in her capacity as a worker.
Our solicitors’ views on the case of Nosworthy v Instinctif Partners Limited UKEAT/0100/18/RN
Sacha Barrett, a Senior Associate in the employment department at Redmans, made the following comments on the case: “This case highlights the importance of employees taking legal advice prior to entering into a share scheme as widely drafted bad leaver provisions can be enforceable.’
The decision of the Employment Appeal Tribunal in UKEAT/0100/18/RN can be found here.