Article: Employment contracts penalty clauses

At BCS legal clinic yesterday, 2 separate foreign applicants came distressed, seeking legal advice on how they can quit their job. They were overworked and exploited. They had thought that if they quit their job, they’d have to pay a hefty sum of money for terminating their employment contract or agreement before a purported “bond” period. When they left the legal clinic, they were uplifted and relieved because they found out from us that they could leave their unhealthy jobs without penal consequences.

One of the applicants had to do 7 ex-colleagues’ work; they all resigned. She worked till 4 am on several days and was verbally abused for failing to meet ridiculous deadlines. She was not allowed to claim overtime pay. The other applicant was made to work long hours without claiming overtime pay. In fact, her contract stipulated that she had to work at least 44 hours a week. When she took MC, her employer will make her “pay back” by working on a Sunday. I was furious when I heard about such exploitative wrongdoing.

First, these applicants fell within scope of employees covered by the Employment Act. And the Act stipulates certain minimum conditions of employment terms which cannot be contracted out. Any contravention of such minimum conditions amount to an offence under the Act.

Second, s 38 of the Employment Act actually provides that 44 hours are the maximum work hours per week for employees, not the minimum. Generally, where employees covered by the Act are required by their employers to work beyond 44 hours, they’re entitled under the Act to claim overtime and rest day pay.

Third, the so-called “bonds” or penalty clauses in their employment contracts are most likely unenforceable. In one case, it said that she had to pay 2 years’ salary for terminating the contract before the 2 years are up. In the other, it was 6 months. These clauses are likely penalties, which are unenforceable as a matter of contract law. Under contract law, contract clauses which stipulate a pre-determined sum of money as damages, known as liquidated damages, may be valid. However, if the stated sum is disproportionately large compared to the primary obligation, the clause may be deemed under the law to be a penalty and therefore not valid and enforceable.

Under Singapore law at present, the touchstone for penalty clauses is still the Dunlop Pneumatic Tyre Company v New Garage and Motor Company [1915] AC 79 (HL) principle that the sum is “not a genuine pre-estimate of loss” (CLAAS Medical Centre v Ng Boon Ching [2010] 2 SLR 38; Max Media FZ LLC v Nimbus Media Pte Ltd [2010] 2 SLR 677). In other words, if the stated sum in the clause is not a genuine pre-estimate of the employer’s loss should the employee terminate his employment, then it’s a penalty clause and not valid and enforceable. The gloss to this principle is the recent UK Supreme Court decision which posits the touchstone of penalty clauses to be “whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation“. (Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Limited v Beavis [2015] UKSC 67 at [32]). It remains to be seen whether the Singapore courts will also adopt the Cavendish Square principle for this doctrine on penalty clauses. (Check out my write-up on this case here.)

Fourth, in some cases I’ve seen, a recruiter would charge a client about 1 month’s salary should the client terminate the employment which the recruiter brokered prior to a stipulated time period. Such contracts would unlikely to be deemed penalty clauses because the 1 month’s salary would likely be the recruiter’s genuine pre-estimate of loss, i.e. the loss of fees which would otherwise have been paid by the employer.

Fifth, in one applicant’s case, she said that when she tried to resign, her supervisor refused to accept her resignation. Employment in modern law is not, and does not condone, slavery. She does not need her resignation to be accepted by her employer. All she needed to do is give (written or oral) notice of termination of her employment. If the employment contract stipulates a notice period, then she would have to continue working for the notice period (and earn her monthly salary during that time) or she could leave before the expiry of the notice period by paying her monthly salary in lieu of working during that period.

Sixth, in another applicant’s case, her employer kept her employment contract and her resignation letter. She had no idea what the contract terms were and no proof of when she had given notice of termination. The employer then refused to cancel her S-Pass even though it was obliged to under the law. She went to the Ministry of Manpower (“MOM”), who purportedly told her that since there was a contract between her and her employer, she had to deal with it herself and MOM couldn’t help her. That’s odd, given that almost all employment relationships would necessarily involve contracts, whether verbal or written. Does it mean that MOM would not get involved in all of such matters? More importantly, this applicant’s case highlights the importance of keeping a copy of documents one signs. This is so that you have the documentary evidence to support your position later, whether you will pursue litigation, complaint, or some other action later.

I hope that this clarifies the misconceptions people have about their employment contracts so they won’t be threatened, oppressed or enslaved by unlawful contract terms. For an article I wrote in the Singapore Law Gazette on termination of employment contracts and dismissal, check it out here.

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