Training cost repayment clauses under scrutiny: Time to review your contracts

The Court of Appeal (“CA”) has handed employers an important reminder about training cost repayment clauses. If you're using these clauses in your employment contracts, now's the time to review them.

The judgment makes one thing clear. If a repayment clause goes further than it needs to protect your business, the courts can strike it out altogether. That means you could lose the right to recover any of your training costs.

Why does this matter?

The law generally prevents employers from placing unreasonable restrictions on an employee's ability to move to another job. This is known as the doctrine of restraint of trade.

To enforce a clause that restricts an employee in some way after they leave, an employer must demonstrate that:

• The clause seeks to protect a legitimate business interest; and

• the clause goes no further than is reasonably necessary to protect that interest.

Training cost repayment clauses have traditionally fallen outside these rules because they don't stop someone taking another job. Instead, they've usually been treated as a contractual debt. This case shows that won't always be true.

The case

Watts worked for Geeks Limited, an IT services company, as a trainee engineer on a salary of £18,000 per annum.

His employment contract required him to repay £8,108 in training costs if his employment ended for any reason other than redundancy. The amount reduced gradually after his first year of employment, depending on how long he stayed with the business.

After eight months, Watts resigned to take a higher paid role. Geeks brought a claim to recover the full cost of the training. The CA held that the repayment clause was an unreasonable restraint of trade and was therefore unenforceable.

Why was the clause unenforceable?

The Court accepted that Geeks had a legitimate interest in protecting the investment it had made in training its employees. However, found that the repayment clause went further than necessary to protect that interest for three reasons:

• It applied whatever the reason for leaving: The clause applied whenever employment ended, except in cases of redundancy. That meant an employee could still be required to repay the costs even if they were dismissed unfairly or resigned because of the employer's conduct. The Court considered this unfair and disproportionate.

• It wasn't linked to competition: The clause made no distinction between an employee leaving to join a competitor and someone leaving the industry altogether. As it applied regardless of where the employee went next, it wasn't closely connected to protecting Geeks' competitive position.

• The financial burden was too great: The repayment amount was significant when compared with Watts' salary. The CA noted that, in practice, the clause had the effect of turning a low paid trainee into something much closer to an unpaid intern.

What does this mean for employers?

This judgment doesn't mean training cost repayment clauses are no longer enforceable.

Employers can still protect genuine training investments, where an employee leaves shortly after receiving the benefit of that training. The key is making sure clauses are fair, proportionate, and carefully tailored, or risk them being found unenforceable.

If you're reviewing your employment contracts, it's worth checking that your training repayment clauses:

• Reflect the actual cost of the training provided.

• Include a reasonable tapering provision so the amount reduces over time.

• Distinguish between reasons for leaving, as a clause that penalises an employee for the employer’s own failings is unlikely to be upheld.

• Genuinely protect the cost of training rather than discourage employees from joining competitors.

• Remain proportionate when compared with the employee's salary.

Time to review your contracts

If you use training cost repayment clauses, you should treat this judgment as a prompt to audit your existing contracts. A clause that is found to be an unreasonable restraint of trade will not be modified by the court; it will be struck out entirely, leaving you with no contractual basis on which to recover your investment.

Taking the time to review your wording now can help protect your business and reduce the risk of disputes in the future.

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