Court of Appeal: training cost clawback clause unenforceable as restraint of trade

Facts

Mr Watts joined Geeks Ltd (Geeks), an IT services provider, in March 2019 as a trainee quality assurance engineer. His contract provided for a starting salary of £18,000 per year, rising to £20,000 in his second year of employment and £22,000 in his third year.

As well as his employment contract, Mr Watts signed a separate training contract. This stated the estimated cost to Geeks of supporting him during a six month training period (the "Training Cost Debt") as £8,108. It provided that after Mr Watts completed 12 months' employment, the debt would be written off at a rate of 1/18^th per subsequent complete month of employment. However, if he left employment for any reason other than redundancy before the debt was completely written off, he would be required to repay the outstanding amount to Geeks. This could be done in 18 monthly instalments, or as a lump sum (which would be discounted by 5% if paid within 10 days of termination).

After eight months, Mr Watts resigned to take up a job as a quality assurance engineer at another company, at a salary of £30,000 per year. Geeks brought proceedings against Mr Watts to recover the Training Cost Debt, which Mr Watts sought to resist on the basis that the clawback provisions constituted an unlawful restraint of trade. The county court upheld Geeks' claim, finding that although the clawback provisions were a restraint of trade, they protected a legitimate interest and were not unreasonable. When Mr Watts' first appeal was unsuccessful, he appealed to the Court of Appeal.

Court of Appeal decision

The court allowed Mr Watts' appeal, holding that the clawback clause was an unenforceable restraint of trade.

Whether a clause amounts to a restraint of trade is a question of substance, not form. The fact that a clawback clause does not prevent an employee from leaving does not mean that the clause is not a restraint of trade. In practice, no clause could prevent an employee from leaving, given the common law rule against specific performance of employment contracts, and the fact that section 238 of the Trade Union and Labour Relations (Consolidation) Act 1992 prohibits injunctions that would require an employee to attend for work. The question is whether the clause, viewed at the time it was made, "will or may have the effect of hampering the employee’s ability to trade freely".

The court proceeded on the assumption that Geeks had a legitimate interest in "maintaining a stable, trained workforce", and focused its analysis on whether the clawback clause went no further than reasonably necessary to protect that interest. It was for Geeks to prove this; Mr Watts did not have to show that it was unreasonable.

There were two key reasons why the court found that the clawback clause was unreasonable:

• It applied whatever the reason for Mr Watts' departure. This included whether he was dismissed or left voluntarily, and whether he left for a job in the same sector or a job in a different sector (with our without a pay-rise), or for no job at all (e.g. to become a carer for a grandparent with dementia).
• Mr Watts was on a low salary. The effect of the clawback provision was therefore that, in the early months of his employment, he "was reduced in retrospect to the equivalent of an unpaid intern".

The court also noted the significant inequality of bargaining power between the parties and the fact that Mr Watts did not have the benefit of legal advice when entering into the training contract. The fact that the contract stated that he had had the opportunity to obtain legal advice was "neither here nor there", as he could not have afforded such advice in any event.

What does this mean for employers?

The facts of this case are unusual, and it does not necessarily mean that all training cost clawback clauses will be considered unenforceable. However, it should act as a prompt for employers to review the wording of their clawback provisions, bearing in mind the following:

• Any sums to be recovered must reflect the cost to the business. Ideally, the clawback should be limited to clearly identifiable costs such as course fees invoiced to the employer by an external training provider. Recovery of notional internal costs is likely to be harder to justify.
• There should be clear exceptions so that the clawback does not bite where employment terminates for reasons that are not the fault of the employee, such as redundancy or ill-health. As noted above, the court in this case referred to the possibility of an employee leaving to become a carer for an elderly relative. It may therefore also be advisable to include a general discretion to waive the clawback in such circumstances.
• The provision should include a taper so that the costs repayable are reduced over time. The court here was critical of the fact that the tapering only kicked in after the employee reached 12 months' service. A taper that begins from the point the costs are incurred is more likely to be reasonable.

If employers wish to set off any money owed under a training clawback provision from any final payments due to an employee, they must also ensure that the clawback clause complies with the rules on unlawful deductions from wages. This requires the employee to provide written consent to the deduction before the cost of the training incurred.

It is also apparent from this decision that it may be easier to justify the use of clawback clauses in contracts with senior employees where there is less inequality of bargaining power, the employee may leave to take on another senior role in the same sector, and the employee has a meaningful opportunity to take legal advice.

Geeks Ltd v Watts