Training fee clawbacks - an unreasonable restraint of trade

Businesses requiring new starters to agree to repayment of training costs if they leave the role early may need to start checking the small print following a recent Court of Appeal decision.

Jeremy Nixon, Partner in Thrings’ Employment team takes a look at the judgment, its view on the restraint of trade, and what employers need to look for in their contractual documentation.

Geeks Ltd v Watts

The dispute followed a disagreement between Geeks Ltd, an IT services company, and a former employee Mr Watts, who joined the company as a trainee quality assurance engineer in 2019.

Alongside his employment contract, Mr Watts signed a separate agreement covering a 'training cost debt' of £8,108 – the estimated cost to the company of training and mentoring him. Under this arrangement, the debt would be written off gradually, at a rate of one-eighteenth a month, once he'd been at the company for a year.

However, if Mr Watts left employment before the debt was cleared, the outstanding balance became repayable in instalments – known as a “training fee clawback” clause – whatever the reason for his departure. The clawback applied even if Mr Watts was moving to a completely different line of work.

Eight months in, Mr Watts resigned for a better-paid role elsewhere. Geeks Ltd took him to the county court to recover the outstanding balance. He argued the clawback clause was an unlawful restraint of trade. Two lower courts sided with Geeks Ltd, but Mr Watts took the case to the Court of Appeal.

What the court decided

In its judgment, the Court of Appeal agreed with Mr Watts that the clause was unenforceable, dismissing the earlier rulings. The court made two points that matter for any business using a similar arrangement.

• A repayment obligation doesn't need to stop someone taking a new job to count as a restraint of trade. What matters is whether it discourages them from leaving their current employment. A clause that leaves an employee facing a hefty bill simply for moving on can restrain trade just as effectively as one that bans them from working for a rival.
• Even where an employer has a genuine interest in holding on to a trained workforce, the clause should be drafted such that it goes no further than necessary to protect that interest. Here, the repayment obligation applied whatever the reason for leaving – dismissal or resignation – and whatever job, if any, the employee went on to do next. The court also noted that, in the first year of his contract, Mr Watts was effectively working for close to nothing once the debt was factored in, on a salary only a little above the minimum wage, without having had any independent legal advice before he signed up.

Why this matters

Training fee clawbacks are not unlawful in themselves and are widely used. The court accepted that protecting an investment in a trained team is a legitimate business concern – but a badly designed scheme can backfire as happened in this case. The CA also noted that the onus is always on the party seeking to enforce a restraint to evidence that the clause goes no further than necessary to protect a legitimate interest.

For example, it may be unenforceable when you most need it and expose the business to litigation risk and reputational damage if it looks an employer is trapping junior or lower-paid staff.

This will be particularly relevant to businesses that invest heavily in apprenticeships, graduate schemes or technical training, where the cost of getting someone job-ready can run into thousands of pounds.

What businesses should consider

For firms that use training fee clawbacks, there are a number of actions to consider:

• Link the repayment amount to actual, evidenced training costs, and reduce it on a clear, fair sliding scale.
• Think carefully about whether the clause should apply on dismissal as well as resignation – applying it regardless of the reason for leaving is a red flag for the courts.
• Keep the repayment period reasonable and proportionate to the employee's salary, so it doesn't leave them effectively unpaid.
• Give new starters time and encouragement to take independent advice before they sign – and keep a record that they did.
• Review existing clawback clauses now, taking legal advice on their enforceability, rather than waiting until you need to action one.

Thrings’ Employment lawyers are experienced in dealing with business matters that affect the workforce and has acted for both employers and employees from start-ups and SMEs all the way to multinational corporations across a wide range of employment matters. To find out how they can help strengthen your polices, and solve your disputes, please get in contact.