In the recent case of Geeks Ltd v Watts, the Court of Appeal held that a contractual clause requiring an employee to repay training costs after leaving within a specified period was an unenforceable restraint of trade.
Background
Mr Watts joined Geeks Ltd (the “Company”) as a Trainee Engineer in March 2019, on a starting salary of £18,000, increasing to £22,000 in three years’ time.
When he joined, Mr Watts signed both an employment contract and a Training Contract. The Training Contract funded a six-month training programme with a training cost debt of over £8,000. On completion of 12 months of employment at the Company, the debt would reduce in increments of 1/18th per subsequent complete months of employment until it reached zero. If his employment ended before the debt was repaid, then Mr Watts would be required to pay the outstanding balance in monthly instalments until fully paid.
In November 2019, Mr Watts resigned from the Company to take up a role at a salary of £30,000. Following this, the Company then issued county court proceedings to recover the debt.
Was the clawback a restraint of trade?
The Court of Appeal considered whether the financial disincentive of repaying the training cost debt would discourage an employee from resigning and working elsewhere.
The Court held that the repayment obligation could have such an effect and therefore concluded that the clawback provision amounted to a restraint of trade.
Was the clawback reasonable?
The Court of Appeal held that the repayment provisions were unreasonable and unenforceable for two reasons.
First, the provisions applied regardless of the reason for the employee’s departure, except in cases of redundancy. The employee was therefore obliged to repay the training cost debt irrespective of whether he left to take up a job in the technology sector or left without another job.
Secondly, when considering the broader picture, in his early months of employment, Mr Watts was paid marginally over the national minimum wage, so the effect of the clawback meant that when reduced in retrospect, he became the equivalent of an unpaid intern.
As such, the Court of Appeal held that this went further than reasonably necessary in protecting the Company’s legitimate interest in maintaining the stability of its trained workforce. The appeal was allowed, and the repayment was set aside.
Practical tips for employers
The Court’s decision should not be taken to mean that all training cost repayment provisions are unenforceable. However, employers should be aware that simply characterising a clawback as a debt does not make it automatically enforceable.
Employers operating training cost repayment provisions should review their arrangements and consider the following:
- Differentiate by reason for departure – clawback clauses that make no distinction between employer-initiated and employee-initiated departures are more likely to be challenged by the courts. Employers should consider narrowing the trigger to voluntary resignations only.
- Structure repayment in instalments – the Court accepted that repayment by monthly instalments is more reasonable than requiring repayment as a full lump sum.
- The debt should reflect an actual cost – the debt needs to be genuinely defensible as an actual cost incurred by the employer.
- Practical impact on the employee – disproportionate impacts on low or modest salaries should be considered and the debt should be measured accordingly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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