Training repayment clause held to be an unreasonable restraint of trade

Background

In Geeks Ltd v Watts, the claimant was employed as a trainee quality assurance engineer. Alongside his contract of employment, he signed a separate training agreement requiring him to repay more than £8,000 in "training costs" if his employment ended before the debt had been written off through continued service.

The employee resigned after eight months to take up a better-paid role elsewhere. His employer sought to recover the outstanding balance under the training agreement.

The county court held that the repayment provisions were enforceable. The employee appealed to the Court of Appeal.

Decision

The Court of Appeal allowed the appeal.

It rejected the employer's argument that the repayment obligation fell outside the restraint of trade doctrine because it was simply a contractual debt. The court held that the doctrine concerns the practical effect of a contractual provision. A significant financial disincentive to leaving employment may restrain an employee's freedom to move to another employer, even if it does not expressly prevent them from doing so. Financial repayment obligations are, therefore, capable of engaging the restraint of trade doctrine.

The court proceeded on the assumption that the employer had a legitimate interest in maintaining a stable, trained workforce. However, it concluded that the repayment provisions went further than was reasonably necessary to protect that interest.

In particular, the repayment obligation applied regardless of why the employee left, whether he resigned voluntarily, was dismissed or left for reasons unrelated to taking another job. Looking more broadly at the arrangement, the court also considered that the effect of the provisions was to reduce the employee's earnings retrospectively during the early months of employment to the equivalent of an unpaid internship, albeit with a loan repayable over time. The employee's lack of independent legal advice and inequality of bargaining power also formed part of the factual context.

The repayment provisions were therefore unenforceable.

Learning points

This decision does not mean that all training repayment clauses are unenforceable. Employers can still seek to protect a genuine investment in training, but any repayment obligation must be no wider than reasonably necessary to protect that legitimate interest.

Employers should review existing training clawback provisions carefully. Clauses that apply regardless of the reason for an employee's departure, or require repayment of sums disproportionate to the employer's legitimate interests, are more likely to be vulnerable to challenge.

The judgment also confirms that the courts will look at the practical effect of a contractual provision rather than its label. Simply describing a repayment obligation as a debt will not prevent it from being scrutinised under the restraint of trade doctrine if, in substance, it operates as a significant disincentive to changing jobs.

For more information or advice, please get in touch with Khadija Khatun in our Employment team.