Training repayment clauses: How far can employers go?

Issue

In Geeks Limited v Joseph Henry Watts, the Court of Appeal considered whether and how the restraint of trade doctrine, which prohibits an employer from restricting an employee’s activities once they leave employment unless that restriction goes no further than is reasonable to protect a legitimate interest, applies to agreements for employees to pay back training costs.

Facts

Mr Watts was employed by Geeks Ltd, an IT company, as a trainee QA engineer on a salary of £18k per year. He entered into a contract of employment and a Contract of Training Investment (Training Contract), which together broadly meant that costs incurred in training Mr Watts would be repayable by him if he left employment within a specified period. The training costs were stated to be around £8,000, which would reduce by 1/18th for every month worked after the first 12 months of employment. Mr Watts left after 8 months employment for a better paid job. Geeks Ltd issued proceedings to recover the training costs. Mr Watts argued that the agreement was a restraint of trade and, therefore, unenforceable.

The County Court decided that, while the agreement to repay the training costs did amount to a restraint of trade, it was reasonable in protecting a legitimate interest, namely retaining staff in whom they had invested time and money. Mr Watts appealed.

Decision

The Court of Appeal allowed the appeal.

They decided that the restraint of trade doctrine applies to the recovery of training costs. Just because the agreement does not explicitly prevent the employee from leaving or working elsewhere, it amounts to an indirect restraint given the financial disincentive from leaving. The question “depends less on legal niceties or theoretical possibilities than on the practical effect of the restraint in hampering the freedom to trade: it is a question of substance, not form”.

The fact that this was a junior employee, on low pay, was relevant. The provisions meant that Mr Watts would have to repay a significant proportion of his already low salary and would have potentially resulted in less than national minimum wage pay, which for public policy reasons could not be right. The Court highlighted that not every repayment clause would necessarily be caught by the doctrine, for example commission or bonus schemes requiring continuing employment, but recovery of training costs, particularly for junior staff, was different.

The Court agreed with the previous decisions that Geeks Ltd had a legitimate interest. However, the repayment provisions were unreasonable for two reasons:

• The provisions applied whatever the reasons for Mr Watts’ departure (with the single exception of redundancy), and
• Looking at the broader picture, the repayment would have effectively led to Mr Watts being treated as the equivalent of an unpaid intern, albeit with a loan repayable over a period.

The Court, therefore, overturned the original decisions and decided that the training cost repayment provisions were not enforceable.

Key points

Clauses which require employees to repay training costs are quite common, although this is the first Court of Appeal decision to consider how they interact with the restraint of trade doctrine. The decision makes clear that financial disincentives, while not explicitly stopping someone from working elsewhere, could still trigger the doctrine. This will be particularly so where the employee is low paid. Maintaining a stable, trained workforce can be a legitimate interest, but the steps taken to protect that must go no further than is reasonable. Employers should review their current repayment clauses and practices and take the following into account:

• Requiring repayment in a lump sum will be less reasonable than instalment payments.
• Disregarding “no-fault” reasons for leaving (for example, redundancy and ill health) will be more reasonable than requiring repayment in the event of a departure for any reason.
• Employees on low salaries are likely to be disproportionately affected by such provisions, so more care needs to be taken in those circumstances.
• Ensure that it is possible to justify and defend the amount of training costs being incurred and recovered.