Did an obligation to repay training costs amount to an unenforceable restraint of trade? | The Indicator Podcast

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In this case, the Court of Appeal considered whether requiring the repayment of training costs when employment comes to an end can amount to an unreasonable restraint of trade. The employee in question was, during his employment with the company, earning little above minimum wage and the training costs it sought to recoup were substantial. Listen along to find out what happened!

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Speaker #0
Today, in the Indicator HR and Employment Law podcast, we're discussing the judgment in the case of Geeks Limited and Watts, in which the Court of Appeal has recently considered whether requiring the repayment of training costs when employment comes to an end can amount to an unreasonable restraint of trade. In this case, W was employed in March 2019 as a trainee quality assurance technician, a role that entails building and maintaining client software. When he was hired, W was a graduate with considerable debt who had been job hunting for some time. His salary was £18,000 for the first year, to rise to £20,000 in the second year, and to £22,000 in the third year. His employment contract stated that formal training courses and conferences were paid for by way of a career development loan, which his employer had the right to recover when the employment came to an end other than due to redundancy. A separate training agreement obliged W to undertake a six-month training period, setting out the costs and cross-referring to the career development loan clause in the employment contract. The total training debt was calculated at £8,108. This was to be repaid either by continuing to work for 18 months beyond his first year, during which time the debt would be written off at one-eighteenth per month, or if he left his employment, by making monthly payments equivalent to one eighteenth of the debt until paid in full, or by paying in full within ten days of the end of his employment, for which a 5% discount would be applied. The training agreement stated that W would not be in breach if he chose to leave his employment, and he was free to pursue other employment or trading opportunities. In November 2019, W resigned to take up a position as a quality assurance technician at another firm on an annual salary of £30,000. When the employer commenced county court proceedings in 2021 because the training debt remained outstanding, W defended the proceedings on the basis that the relevant contractual terms were an unlawful restraint of trade. After the county court and High Court found against him, W appealed to the Court of Appeal. The Court of Appeal found that the application of the restraint of trade doctrine was a question of substance, not form. It did not matter that the agreement framed the repayment as a debt or stated that the employee could leave. It is not possible for a contractual provision to prevent an employee leaving their employment, and the court will not order specific performance to compel an employee to work. The relevant question is whether, at the time of entering into the contract, the provision or provisions will or may have the effect of hampering the employee's ability to trade freely. Although most case law dealt with restrictions on where, when or for whom an employee could work, financial disincentives could be classed as a restraint of trade. Restraint of trade clauses are permitted as long as they go no further than is reasonably necessary to protect the employer's legitimate interests. Although it is legitimate for an employer to seek to maintain a stable, trained workforce, the relevant provisions in this case went further than was reasonably necessary. The scope of the obligation was too wide, applying if the employee left for any reason other than redundancy. So the debt would arise no matter whether the employee was summarily dismissed or voluntarily resigned , whether they went to work for a competitor or left their employment to care for a relative, and it was not economically viable. W was paid just above minimum wage, so the effect of the clawback would reduce him to the equivalent of an unpaid intern in retrospect. Further, the calculation of the sum owed was highly questionable and could not be justified. The prospect of such a significant debt being imposed on leaving employment, especially on an early career employee, would hamper their freedom to change jobs. The Court of Appeal noted that it was not on W to prove that the repayment provisions were unreasonable. The onus was on the employer to show that it went no further than was necessary to protect its legitimate interests, but it had not been able to do so. Further, W had no independent advice when he signed the contract. Although the recitals recorded that he had been given the opportunity to do so, the evidence showed that he could not afford it. There had therefore been significant inequality between the contracting parties, especially given W was at the start of his career on a relatively low wage. The Court of Appeal ruled that the training repayment provisions were an unlawful restraint of trade and unenforceable. Training repayment clauses are relatively common. This case reminds employers to review their contracts to ensure they only go as far as is reasonably necessary to protect their legitimate interests, bearing in mind that in the case of a dispute, the court will look at the reality of the circumstances, not just the wording used. Employers who want to include a training repayment mechanism in their contract should check that the circumstances in which it is triggered are reasonable, the repayment sum is a genuine representation of the employer's training spend and can be evidenced, the repayment mechanism is reasonable - the Court of Appeal commented that installments were more reasonable than requiring payment as a lump sum - and it is reasonable given the relative bargaining powers of the parties. Look out for further episodes in this series to stay up to date on all things HR and employment law related.

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Visit www.indicator.co.uk to explore our product range, or connect with us on social media:

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Hosted on Ausha. See ausha.co/privacy-policy for more information.

Transcription

Speaker #0
Today, in the Indicator HR and Employment Law podcast, we're discussing the judgment in the case of Geeks Limited and Watts, in which the Court of Appeal has recently considered whether requiring the repayment of training costs when employment comes to an end can amount to an unreasonable restraint of trade. In this case, W was employed in March 2019 as a trainee quality assurance technician, a role that entails building and maintaining client software. When he was hired, W was a graduate with considerable debt who had been job hunting for some time. His salary was £18,000 for the first year, to rise to £20,000 in the second year, and to £22,000 in the third year. His employment contract stated that formal training courses and conferences were paid for by way of a career development loan, which his employer had the right to recover when the employment came to an end other than due to redundancy. A separate training agreement obliged W to undertake a six-month training period, setting out the costs and cross-referring to the career development loan clause in the employment contract. The total training debt was calculated at £8,108. This was to be repaid either by continuing to work for 18 months beyond his first year, during which time the debt would be written off at one-eighteenth per month, or if he left his employment, by making monthly payments equivalent to one eighteenth of the debt until paid in full, or by paying in full within ten days of the end of his employment, for which a 5% discount would be applied. The training agreement stated that W would not be in breach if he chose to leave his employment, and he was free to pursue other employment or trading opportunities. In November 2019, W resigned to take up a position as a quality assurance technician at another firm on an annual salary of £30,000. When the employer commenced county court proceedings in 2021 because the training debt remained outstanding, W defended the proceedings on the basis that the relevant contractual terms were an unlawful restraint of trade. After the county court and High Court found against him, W appealed to the Court of Appeal. The Court of Appeal found that the application of the restraint of trade doctrine was a question of substance, not form. It did not matter that the agreement framed the repayment as a debt or stated that the employee could leave. It is not possible for a contractual provision to prevent an employee leaving their employment, and the court will not order specific performance to compel an employee to work. The relevant question is whether, at the time of entering into the contract, the provision or provisions will or may have the effect of hampering the employee's ability to trade freely. Although most case law dealt with restrictions on where, when or for whom an employee could work, financial disincentives could be classed as a restraint of trade. Restraint of trade clauses are permitted as long as they go no further than is reasonably necessary to protect the employer's legitimate interests. Although it is legitimate for an employer to seek to maintain a stable, trained workforce, the relevant provisions in this case went further than was reasonably necessary. The scope of the obligation was too wide, applying if the employee left for any reason other than redundancy. So the debt would arise no matter whether the employee was summarily dismissed or voluntarily resigned , whether they went to work for a competitor or left their employment to care for a relative, and it was not economically viable. W was paid just above minimum wage, so the effect of the clawback would reduce him to the equivalent of an unpaid intern in retrospect. Further, the calculation of the sum owed was highly questionable and could not be justified. The prospect of such a significant debt being imposed on leaving employment, especially on an early career employee, would hamper their freedom to change jobs. The Court of Appeal noted that it was not on W to prove that the repayment provisions were unreasonable. The onus was on the employer to show that it went no further than was necessary to protect its legitimate interests, but it had not been able to do so. Further, W had no independent advice when he signed the contract. Although the recitals recorded that he had been given the opportunity to do so, the evidence showed that he could not afford it. There had therefore been significant inequality between the contracting parties, especially given W was at the start of his career on a relatively low wage. The Court of Appeal ruled that the training repayment provisions were an unlawful restraint of trade and unenforceable. Training repayment clauses are relatively common. This case reminds employers to review their contracts to ensure they only go as far as is reasonably necessary to protect their legitimate interests, bearing in mind that in the case of a dispute, the court will look at the reality of the circumstances, not just the wording used. Employers who want to include a training repayment mechanism in their contract should check that the circumstances in which it is triggered are reasonable, the repayment sum is a genuine representation of the employer's training spend and can be evidenced, the repayment mechanism is reasonable - the Court of Appeal commented that installments were more reasonable than requiring payment as a lump sum - and it is reasonable given the relative bargaining powers of the parties. Look out for further episodes in this series to stay up to date on all things HR and employment law related.

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