Training cost clawbacks: when does repayment become an unlawful restraint?

Training repayment agreements are common. An employer pays for an employee’s training, and, in return, the employee agrees to repay some or all of the cost if they leave within a certain period.

But there are limits on what employers can recover.

The recent Court of Appeal decision in Geeks Ltd v Watts shows that a repayment requirement can sometimes be so significant that it unfairly restricts an employee’s ability to leave their job.

An £8,108 bill on an £18,000 salary

Mr Watts joined Geeks as a trainee engineer earning £18,000 a year. His agreement said that he owed £8,108 in training costs. He would have to repay this if he left within his first 12 months, with the amount then gradually reducing over the following 18 months.

After eight months, Mr Watts resigned to take a new job paying £30,000. Geeks asked him to repay the £8,108.

The Court of Appeal decided that the repayment clause was an unreasonable restraint of trade and could not be enforced.

The agreement did not actually say that Mr Watts was prevented from working elsewhere. However, the amount he would have to repay was so significant that, in practice, it could discourage him from leaving.

What should employers check?

The decision gives HR teams some useful questions to ask when reviewing training repayment agreements:

• Are you recovering genuine training costs? In Geeks, the calculation included mentoring costs and the employee’s own salaried study time.
• Is the repayment reasonable compared with salary? The size of the debt compared with Mr Watts’ relatively low salary was important.
• Does the amount reduce over time? Mr Watts received no reduction at all during his first year.
• When does repayment apply? The clause applied to almost every type of departure except redundancy.
• Did the employee have a proper opportunity to consider the agreement? How and when the agreement was signed can also be relevant.

Two possible problems with enforceability

Training repayment clauses can potentially be challenged in two different ways.

First, a clause might be an unlawful penalty if the financial consequence imposed on the employee is out of proportion to the employer’s legitimate interest in protecting its investment.

Second, as in Geeks, it might be an unreasonable restraint of trade because the financial cost of leaving makes it too difficult for the employee to move to another job.

This does not mean employers should stop using training repayment agreements. But they should be carefully drafted.

For HR, the key is to make sure that repayment reflects genuine costs and that the amount is reasonable, proportionate and reduces fairly over time.

About Jon Dunkley

Jon Dunkley is a Partner at Wollens and heads up the firm’s Regulatory Department. Based at our North Devon office, Jon is a highly experienced solicitor with a broad commercial and regulatory practice, supporting businesses, professionals and senior employees across a wide range of legal issues.

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