The Court of Appeal has held that an employer’s ‘training fee clawback’ scheme, which required an employee to repay the cost of his training irrespective of whether he remained in employment, constituted a restraint of trade because it hindered his ability to trade (work) freely.
In the case of Geeks Ltd v Watts, the financial disincentive was not exempt as a class from the restraint of trade doctrine. The repayment provisions also went further than reasonably necessary to protect the employer’s legitimate interest in maintaining a stable, trained workforce and were therefore held to be unenforceable.
In March 2019, W was engaged by G Ltd as a trainee quality assurance (QA) engineer. His contract of employment provided for an annual starting salary of £18,000 rising to £22,000.
W also signed a separate training contract, by which he agreed to meet a ‘training cost debt’ of £8,108, which represented the estimated financial cost of training him in the position.
The training contract provided that the debt would be written off at the rate of 1/18th per month of employment after the first 12 months, but that if W’s employment ended before the debt was fully repaid, the outstanding balance would be repayable in monthly instalments. The training contract stated, for the avoidance of doubt, that W would not be in breach of contract if he chose not to remain at G Ltd, and that nothing in it was intended to restrict him from pursuing other employment.
Eight months into his employment, W resigned for a better paid job. G Ltd brought legal proceedings to recover the £8,108, which W argued was an unlawful restraint of trade.
The case went all the way to the Court of Appeal which rejected G Ltd’s argument that the clawback provisions were not in restraint of trade at all and were simply enforceable as a debt, regardless of whether W resigned or not.
The application of the restraint of trade doctrine depends on the practical effect of the restraint in hampering the freedom to trade: it is a question of substance, not form.
It was no answer to say that the training clauses did not prevent any employee from leaving. No clause could do so, by virtue of the common law and statutory rules. The question was whether, viewed at the time the contract was made, the provisions would or might have the effect of hampering the employee’s ability to trade freely. Financial disincentives were not exempt as a class from the doctrine.
In the court’s view a clause in an employment contract providing that in specified circumstances all or part of the salary paid may be repayable to the employer clearly engaged the doctrine of restraint of trade. If it was otherwise, a clause requiring repayment of an employee’s entire gross salary on leaving within 12 months would be enforceable as a debt without any enquiry into its reasonableness.
G Ltd sought to rely on the High Court’s decision in Steel v Spencer Road LLP which held that a bonus clawback payable if an employee left or gave notice within three months of payment was not a restraint of trade. In the Court of Appeal’s view, the result in Steel was no doubt correct, but it did not support the broader proposition that the restraint of trade doctrine was only applicable to contractual provisions which directly limited the employee’s activities after leaving employment. The doctrine was engaged in this case where the clawback provisions constituted an indirect restraint when they came into effect after W had left G Ltd.
The Court agreed that G Ltd had a legitimate interest in maintaining a stable, trained workforce.
However, it held that it could not be said that the clawback provisions went “no further than reasonably necessary to protect G Ltd’s legitimate interest”. First, with the single exception of redundancy, they applied whatever the reason for W’s departure, whether he was dismissed or left voluntarily, and irrespective of whether he left for another technology job or even for no job.
Secondly, looking at the broader picture, the effect of the clawback provisions was that, in the early months of his employment, W, who was paid not much more than the NMW, was reduced in retrospect to the equivalent of an unpaid intern, albeit with a loan repayable over a period.
The Court also noted that W had not had independent legal advice when signing the contracts and that there was therefore inequality of bargaining power. Employers should heed carefully the reasoning of the Court in formulating their repayment clauses, if any, in such arrangements and ensure that they are closely aligned with their legitimate business interests and do not indirectly or directly hiinder, especially lower paid or junior employees continuing their careers.
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