Do you include a training repayment clause in your contracts of employment?

The law

Restraint of trade is a long standing legal principle that strikes down contractual terms that unreasonably restrict someone's ability to work or trade freely, unless the party relying on the clause can show it protects a genuine business interest and goes no further than necessary.

Background

In Geeks Ltd v Watts, Mr Watts joined the IT company as a trainee quality assurance engineer. He had no specific experience and Geeks agreed to train him on the job. He was paid £18,000 per year, and the contract provided for this to increase annually to £22,000 in year two and £24,000 in year three. His contract of employment also included a clause which required Mr Watts to replay the costs of his training. 

Mr Watts signed a separate training contract. It specified that the first six months of his employment would be spent training him, at a cost of £8,108 (including mentoring and study and practice). This was repayable as a debt and would be reduced by a 1/18th per month after 12 months and extinguished after 30 months. If his employment ended before the debt was repaid, he agreed to repay it at a rate of 1/18th per month.

Mr Watts resigned after eight months to take up a new job paying £30,000 per annum. Geeks asked him to repay the training debt and sued him when he refused.

The County Court gave judgment in favour of Geeks. It held that the clause was subject to the restraint of trade rules but, was enforceable because:

• Geeks had a legitimate interest in retaining and using the skills of employees it had invested in; and
• the clawback provisions were reasonable because they reflected the fact that, once trained, Mr Watts would be able to earn a lot more money.

Mr Watt's appeal failed and he appealed to the Court of Appeal.

Decision of the Court of Appeal

The Court of Appeal found in favour of Mr Watts and set aside the previous decisions. It held that the clawback provisions in the contract of employment were an unreasonable indirect restraint on Mr Watt's ability to work elsewhere. 

The court accepted as a general principle that employers have a legitimate interest in maintaining a stable and trained workforce and can, potentially, require their staff to repay costs associated with training them. But only if the repayment clause is reasonable. 

The court set out the basic rules that apply to these types of cases:

• The onus is on the employer to show that the repayment clause didn't go further than it needed to to protect its legitimate interests
• Is there an inequality of bargaining power between the parties? And did the party with less power (i.e. the employee) take legal advice before they signed the agreement?
• Is the clause reasonable at the time it was entered into without the benefit of hindsight?

Applying those principles to the facts of the case, the court accepted that the whole amount wasn't repayable all at once. This pointed towards reasonableness. However, the debt itself was predicated on an assumption that Mr Watts wouldn't be doing any valuable work for the company during his first six months employment. That was incorrect - he did undertake work and clients were billed for his services during this time. The figure itself was also ‘highly questionable’ - in particular the costs of mentors (at £60 an hour) which was five or six times what they were actually paid.

The court concluded that the repayment terms were unreasonable and unenforceable because they applied in all circumstances (other than redundancy). Mr Watts was not paid much more than the NMW during his employment and the effect of the clawback provisions put him in a similar position to that of an unpaid intern.

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