Case update

‘Training fee clawback’ scheme constituted restraint of trade

Summary

In Geeks Ltd v Watts, the Court of Appeal has held that a "training cost clawback" scheme, which required an employee to repay the cost of his training whether or not he remained in employment, constituted an unlawful restraint of trade and was unenforceable.

The Court confirmed that financial disincentives are not exempt as a class from the restraint of trade doctrine and that a clause does not need to impose an explicit ban on working elsewhere to fall within the doctrine. As the repayment provisions went further than reasonably necessary to protect the employer's legitimate interest in maintaining a stable, trained workforce, they were void and unenforceable.

The decision is an important reminder that a clause labelled as a "training repayment provision" will not automatically escape scrutiny. What matters is the practical effect of the clause on the employee's freedom to trade.

We summarise practical takeaways for employers below.

Background

Mr Watts was employed by Geeks Ltd (Geeks) as a trainee quality assurance engineer, on a starting salary of £18,000, which was due to rise to £20,000 and £22,000 over a 3 year period. Alongside his employment contract, he entered into a separate training contract under which he agreed to a "training cost debt" of £8,108, described as the estimated cost of the support and mentoring provided to him.

Under the contract, the debt was to be written off at the rate of 1/18th per month of employment, but only after his first 12 months of service. If Mr Watts's employment ended before the debt was fully repaid, the outstanding balance became repayable in monthly instalments. The training contract expressly stated that he would not be in breach if he chose not to remain with the company and that nothing in it was intended to restrict him from pursuing other employment.

After eight months, Mr Watts resigned for a better-paid quality assurance role with another company. As the debt did not begin to reduce until after 12 months of service, no part of it had been written off, and Geeks sought full repayment of the £8,108 sum through county court proceedings. Mr Watts defended the claim on the basis that the clawback provisions constituted an unlawful restraint of trade.

Note on terminology

The restraint of trade doctrine is a common law rule (i.e. one created through case law before the courts over many years) providing that contractual terms limiting a person’s freedom to work, trade or run a business (such as post-termination restrictive covenants) are void unless they:

1. Protect a legitimate interest; and

2. Go no further than reasonably necessary to protect that interest.

Court decisions

At first instance, the Deputy District Judge held that, whilst the provisions could amount to a restraint of trade, they were in fact not unreasonable as they protected Geek’s legitimate business interests. That decision was upheld on appeal by the Circuit Judge. Mr Watts appealed to the Court of Appeal, where the appeal was allowed and the county court decisions were set aside, holding that the clawback provisions engaged the restraint of trade doctrine and were unenforceable.

Practical effect, not labels

The Court of Appeal held that whether the restraint of trade doctrine applies depends on the practical effect of a provision in damaging an employee's freedom to trade; it’s a question of substance. It was not enough that the clauses of the contract did not prevent Mr Watts from leaving.

Instead, the question is whether, at the time the contract was made, the provisions might have the practical effect of damaging the employee's ability to trade freely. These provisions usually concern express restrictions relating to:

who the employee can work for on termination of the contract;
what clients or customers they can deal with or solicit; or
whether the employee can solicit other employees they worked with.

However, financial disincentives, such as repayment of some or all of salary in certain circumstances (training costs in this case), can also fall within the scrutiny of the restraint of trade doctrine.

The provisions failed the test of reasonableness

The Court of Appeal accepted that, in principle, Geeks had a legitimate interest in maintaining a stable, trained workforce, but held that the provisions went further than reasonably necessary to protect this interest.

Two reasons were key to the Court’s decision:

1. First, other than redundancy, the clawback applied whatever the reason for departure, whether voluntary or not, and whether or not the employee left for another job.

2. Second, the size of the debt compared to his salary created a disproportionate consequence (if enforced) that, given his wages at the time were little over national minimum wage, it would retrospectively reduce his role to that of an unpaid intern.

The Court also noted several other features that weighed against Geeks: the basis of calculation was disputed, with internal mentoring costed at £60 an hour (five to six times what Mr Watts’s mentor was being paid by Geeks), while Geeks was also charging clients for Mr Watts's work; and Mr Watts had not received independent legal advice when signing.

Conclusion

The Court of Appeal held that financial penalties and clawback provisions fall under the restraint of trade doctrine if they make it harder for an employee to leave their job, even if there is no express ban on working elsewhere. The provisions were not simply recovery of a debt. It held that the large liability could discourage Mr Watts from resigning and thereby restricted his freedom to work elsewhere.

Although employers are entitled to protect their investment in staff training, the training repayment clause was deemed unreasonable because it applied in almost every situation where employment ended, regardless of whether the departure caused any harm to the business.

The Court also considered the debt excessive in light of Mr Watts’s relatively modest income. In rejecting the argument that the training repayment clause was a simple debt repayment, the Court reaffirmed that the law looks at a clause’s practical effect rather than the label attached to it.

Key takeaways for employers

This decision does not mean that training clawback arrangements are unenforceable as a matter of principle, rather, it sets a clear standard for how they must be structured and justified. Employers who use training clawback or similar arrangements should consider the following.

Drafting the contractual clause

A clause labelled as a training repayment provision will not automatically avoid restraint of trade principles. Employers should assume that a court will look behind the wording to ask what the clause actually does.
The sum claimed should genuinely reflect the costs incurred and employers should keep records capable of demonstrating that link. Inflated figures will attract scrutiny, particularly where internal time is charged out at a higher rate than was actually paid, or where the employer is simultaneously charging clients for work. A repayment figure that looks more like a penalty or profit than a genuine recovery of loss could be open to scrutiny.
The repayment obligation should reduce over time in line with the value the employer receives from retaining the employee, rather than sitting at full value for a fixed period and then falling away. A scheme where nothing is written off until after a threshold of service (so that an early leaver owes the full amount) is harder to justify than one that tapers from day one.
The longer the period over which repayment can be triggered, the greater the risk that the clause restricts the employee's freedom to move on. The period should not be longer than is genuinely needed to return the investment.
The size of any repayment should be proportionate to the employee's pay. A heavy debt against a modest salary may be viewed as disproportionate, especially where it would strip the employee of several months' earnings. It will rarely be reasonable to expect recovery of a substantial sum from someone in a relatively low-paid role.
A clause that applies to almost every scenario, whatever the reason, is much more likely to be unreasonable. Consider limiting clawback to circumstances that genuinely justify protecting the investment (for example, voluntary resignation to join a competitor) and carving out departures that do not harm the business.

Reviewing existing arrangements

Employers should review their current clawback provisions rather than wait for a dispute. When reviewing an existing clause, consider whether:

the amount genuinely reflects the costs actually incurred and can be evidenced;
the repayment obligation reduces over time rather than applying in full for a set period;
the repayment period is no longer than is genuinely necessary to protect the investment;
the clause is limited to departures that actually threaten the business;
the sum is proportionate to the employee's salary, or would be unrealistic to recover from a low-paid role;
the clause could reasonably be viewed as deterring people from leaving rather than simply protecting an investment; and
the employee had a fair opportunity to understand the terms and take advice before signing.

Conclusion

Investing in training and qualifications may still provide a legitimate basis for seeking repayment if an employee leaves soon after receiving training. However, the drafting must be reasonable and proportionate, and the employer should be doing all it reasonably can to retain staff through positive means rather than relying on financial deterrents.

Where a clause is proportionate, properly costed and limited to circumstances that genuinely justify recovery, it is far more likely to be enforceable.

Disclaimer

This update should not be treated as legal advice and only provides general information on the issues discussed.