A ‘training fee clawback’ scheme, which required an employee to repay the cost of his...
Training costs and restraint of trade
A ‘training fee clawback’ scheme, which required an employee to repay the cost of his training regardless of whether he remained in employment was unenforceable, as it amounted to an unreasonable restraint of trade.
Background
Mr Watts joined Geeks Ltd in March 2019 as a trainee Quality Assurance Engineer. His salary was £18,000 in the first year, increasing to £20,000 and £22,000 in years two and three. On joining, Mr Watts signed a training agreement requiring him to repay £8,108 in training costs to Geeks if his employment ended for any reason other than redundancy. The arrangement stipulated that the amount repayable would gradually reduce after his first year of employment, but if he left before the debt was written off, he would have to repay the outstanding balance.
Mr Watts resigned after eight months to join another company in a higher paid role, and Geeks brought a claim against Mr Watts to recover the full amount of the training costs. Mr Watts defended the civil proceedings on the basis that the relevant contractual terms amounted to an unlawful restraint of trade. Both the county court and High Court found against him, so he appealed to the Court of Appeal.
Court of Appeal decision
The Court of Appeal rejected Geeks’ argument that the clause was simply a debt repayment provision and therefore fell outside the restraint of trade doctrine. It held that the application of the restraint of trade doctrine depends on the practical effect of the restraint in hampering the freedom to trade and that financial penalties for leaving employment can amount to a restraint of trade, even if they do not expressly prevent an employee from resigning.
Although most of the relevant case law deals with post-termination restrictions, financial disincentives to leaving could also be classed as a restraint of trade. The case law did not support the proposition that the restraint of trade doctrine is only applicable to contractual provisions that seek directly to limit the employee's activities after they leave employment.
The Court of Appeal found that the training fee clawback was a restraint of trade and that, even if Geeks had a legitimate interest to protect, the restraint was not justified. The arrangements went further than was reasonably necessary. The repayment clause was therefore unenforceable. In reaching this conclusion, the court relied on two reasons:
- The repayment provisions applied irrespective of the reason for termination of employment (other than for redundancy), or whether Mr Watts was leaving to work in the same industry, a different industry or not to work at all.
- Looking at the broader picture, the effect of the clawback provisions was that, in the early months of his employment, Mr Watts, who was paid not much more than the national minimum wage, was reduced in retrospect to the equivalent of an unpaid intern, albeit with a loan repayable over time.
In the circumstances, the court did not accept that the repayment provisions went no further than reasonably necessary to protect the legitimate interests of Geeks.
Comment
This is the first Court of Appeal authority directly to consider whether workplace training cost recoupment provisions engage the restraint of trade doctrine.
Whether training repayment clauses are reasonable and enforceable will depend on many things, among them the following:
- the reasonableness of the circumstances in which it the duty to repay is triggered
- whether the recoupment amount is a genuine representation of the true cost of the training (and how this can be evidenced)
- the reasonableness of the repayment mechanism (e.g. instalments v lump sum)
- the impact on low earners, particularly if recoupment will retrospectively reduce them below national minimum wage
- proportionality - repayment obligations that reduce over time to reflect the value the employer has already received from the employee's service
Labelling a payment obligation as a ‘debt’ or ‘training cost’ will not automatically make it enforceable. The courts will look at the practical effect of the clause. If a repayment provision operates as a significant financial deterrent to changing jobs, it may engage the restraint of trade doctrine and be unenforceable.