Key takeaways
Restraint of trade doctrine can apply to training repayment clauses
Financial disincentives to leaving employment can be unreasonable restraints.
Reasonableness determines enforceability
Repayment obligations must go no further than necessary to protect employer’s legitimate interests.
Employers should review training agreements
Costs, triggers, and repayment terms must be justified and proportionate.
Unless it can be justified as reasonably necessary to protect the employer's legitimate interests, a contractual term restricting an individual's freedom to work is void as a restraint of trade. The Court of Appeal has recently considered whether the restraint of trade doctrine can extend to an agreement that requires the repayment of training costs.
When W was hired as a trainee quality assurance technician, he signed:
an employment contract that provided for a career development loan (CDL) and entitled the employer to recover the cost of any formal training course or conferences that W attended or undertook at the employer’s expense under the CDL in the 18 months preceding the termination of his employment and
a training contract, which obliged W to undertake a 6-month training period and specified that the Total Cost Debt (TCD) for this ‘in-house’ training was £8,108, with this TDC to be repaid either by W continuing to work for 18 months beyond his first year or becoming payable as either a lump sum or in instalments if his employment ended.
W resigned after eight months to work for another firm and the employer commenced civil proceedings to recover the £8,108 TCD. W defended the civil proceedings on the basis that the relevant contractual terms amounted to an unlawful restraint of trade. Both the county court and High Court found against him, so W appealed to the Court of Appeal.
The Court of Appeal firstly held that contractual provisions for the recoupment of training costs engaged the restraint of trade doctrine. While not every provision that results in the forfeiture of a benefit if the employee leaves employment will amount to a restraint of trade, financial disincentives to leaving employment are not exempt from scrutiny under the restraint of trade doctrine. The key focus is on ’the practical effect of the restraint in hampering the freedom to trade: it is a question of substance, not form’. Although most of the relevant case law deals with post-termination restrictions, financial disincentives to leaving could also be classed as a restraint of trade. The case law did not support the proposition that the restraint of trade doctrine is only applicable to contractual provisions that seek directly to limit the employee's activities after they leave employment.
Turning to the reasonableness of the provisions, the Court proceeded on the basis that the employer had a legitimate interest in maintaining a stable, trained workforce. The Court also accepted that allowing repayment of the TCD by monthly instalments was more reasonable than requiring £8,108 to be repaid as a lump sum.
However, the Court nevertheless held that the contractual provisions for recoupment of training costs were unenforceable because they went further than reasonably necessary to protect the employer's legitimate interests. The recoupment provisions applied whatever the reasons for the employee's departure and irrespective of whether he left for a job in the technology sector or elsewhere, with a salary increase or none, or for no job at all.
Further, the broad effect of the recoupment provisions meant that should W leave in the early months of his employment he would be required to repay almost all of his salary (bearing in mind that he was paid was not much more than the national minimum wage). That would reduce him to something akin to an unpaid intern. The Court could not accept that the recoupment provisions went no further than reasonably necessary to protect the employer’s legitimate interests.
Whilst not required to determine this issue per se, the Court also considered that calculation of the £8,108 TCD to be ’highly questionable’, noting that this included an hourly charge for in-house mentoring which was 5-6 times higher than the hourly rate of pay of W’s mentor, and also that the amount of training/mentoring provided left the majority of W’s working day unaccounted for, so it was highly artificial of the employer to suggest that it derived no value from W’s activities during those unaccounted for hours, particularly when the evidence demonstrated that its clients had been billed for W’s services.
This is the first Court of Appeal authority to directly consider whether workplace training cost recoupment provisions engage the restraint of trade doctrine. We anticipate further litigation in relation to these and other financial disincentives to employee’s leaving their employment. Many employers will operate training repayment clauses or agreements, particularly where external training courses are provided, and employers may wish to review these to ensure they remain reasonable and offer the prospects of being enforceable. Consideration should be given to:
the reasonableness of the circumstances in which it the duty to repay is triggered
whether the recoupment amount is a genuine representation of the true cost of the training (and how this can be evidenced)
the reasonableness of the repayment mechanism (e.g. instalments v lump sum)
the impact on low earners, particularly if recoupment will retrospectively reduce them below national minimum wage
the imbalance of bargaining powers and prospects of the employee being in a position to take legal advice.
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