At a Glance
Many employers use training repayment provisions to protect investments made in developing their workforce. The Court of Appeal’s recent decision in Geeks Ltd v Watts has recently held that these arrangements may not only be susceptible to challenge as penalty clauses (as earlier cases have considered), but are also capable of engaging the restraint of trade doctrine and, where they do, will be unenforceable unless they go no further than reasonably necessary to protect a legitimate business interest. Significantly, the Court rejected any suggestion that financial disincentives are immune from restraint of trade scrutiny simply because they do not prohibit competition outright.
What Happened?
In a recent Court of Appeal decision, an employee had signed a training investment agreement requiring him to repay over £8,000 of training costs if he left employment before the amount had been worked off over time. He resigned after eight months for a higher-paid role and the employer sought repayment of the full amount.
The Court of Appeal ultimately held the clawback provisions were unenforceable.
Why Did the Employer Lose?
The Court of Appeal applied the familiar restraint of trade analysis:
- The clause was capable of being a restraint of trade: The Court rejected the argument that only clauses directly restricting future employment can engage the doctrine. A substantial financial disincentive to leaving employment may also do so. The question is whether the provision restricts, or might restrict, an employee’s ability to trade freely.
- The employer had a legitimate interest: The Court proceeded on the basis that maintaining a stable, trained workforce was capable of constituting a legitimate business interest. However, it noted that the scope of that legitimate interest has not been examined in detail by the courts for more than three decades, meaning further guidance may emerge in future cases.
- The clause went further than reasonably necessary: This was where the provisions failed. The Court identified a number of factors pointing away from reasonableness:
- The repayment obligation applied regardless of the reason for departure
- There was a significant imbalance in bargaining power between the parties
- The employee was relatively low paid and the amount sought was substantial compared to his earnings (£18,000 in his first year of employment)
- The practical effect was that the employee could be left in a position broadly comparable to having worked for little or no reward during the early months of employment
The Court also emphasised that reasonableness must be assessed at the time the agreement is entered into, rather than with the benefit of hindsight. The Court also commented that a contractual statement that the employee had the opportunity to obtain legal advice was of limited assistance where that was not realistically available.
Practical Lessons for Employers
The decision does not establish that all training cost repayment provisions are restraints of trade, nor that they are necessarily unenforceable. However, employers should review existing arrangements carefully and keep in mind the following when reviewing these clauses:
- Repayment by monthly instalments is likely to be more reasonable than requiring repayment as a lump sum (or if failure to make one monthly payment triggers liability for the remaining balance)
- Clawback provisions that apply regardless of the reason for departure, including employer-initiated dismissal, are vulnerable to challenge – consider whether carve outs, for example, for redundancy, long-term ill-health and dismissal without misconduct are appropriate
- The impact of the clawback provisions on the employee, in particular those on low or modest salaries who may be disproportionately affected by recoupment
- Check the amount of the debt bears a genuine and defensible relationship to the actual cost incurred by the employer (including the calculation of the training costs and providing for a sliding-scale recovery)
- Distinguish between external training costs and ordinary employment costs and supervision costs, which may be harder to justify as recoverable training investments
- Recitals about employees having had an opportunity to get legal advice are only likely to assist where that opportunity is genuinely available in practice
Looking Ahead
One of the most significant aspects of Geeks v Watts is its confirmation that financial disincentives are not automatically exempt from the restraint of trade doctrine. The Court of Appeal emphasised that not every provision which causes an employee to lose a benefit on termination will necessarily amount to a restraint of trade (or an unreasonable one), but parties will need to work through the usual restraint of trade analysis.
For now, employers should ensure that training repayment provisions are carefully calibrated to protect genuine training investments and can be justified as no more restrictive than reasonably necessary.
