The practice requiring workers to repay their training costs if their employment ends within a specified time period has hit the news of late. Capita and FDM Group were brought to the public attention for imposing such practices which many have deemed to be unfair. In these cases, graduates were required to work for two years after the completion of their training or face repayment of training fees which were around £20,000.
Following the publicity around this issue, there has been growing pressure on companies to cease this practice. Frank Field, the Labour MP and chair of the parliamentary work and pensions committee, recently wrote to the Business Secretary, Greg Clark, asking if he would, “consider a public inquiry into the extent and consequences” of the practice and if further protection for workers was required. In addition, legal action was commenced against Capita and FDM.
Consequently, Capita has since stated, “the repayment clauses for training used in 2015 comply with current legislation and are common practice in the industry, however they are no longer used.”
As a result, employers should consider whether they use such provisions within their contracts, and whether the clauses can be considered reasonable and whether they would be enforceable if tested.
Are you at risk?
Many businesses still rely on clauses that recoup training costs, especially as the costs may be significant to the business and the employer striving to obtain value from the training which has been paid for. There is often no easy answer as to whether such clauses are enforceable and they will depend on the circumstances of each case and the wording of each clause. Training costs will usually be challenged on two legal grounds, firstly that the provision amounts to a penalty clause and secondly because the provision amounts to a restraint of trade.
Does the clause amount to a penalty clause?
The essence of a penalty clause is that it imposes a detriment out of proportion to the legitimate interest of the innocent party in the enforcement of contractual obligations. In the context of training costs, often employers will include an agreement that the employee will pay a specified sum in the event that the employee leaves within a specified time period. Such clauses will be unenforceable if they are disproportionate to the actual losses which would be suffered by the employer as a result of the employee leaving.
The legal principle is that where compensation payable is wholly disproportionate to the highest level of damages which could arise from the breach, such clauses are likely to be an unenforceable penalty clause.
Case law has held that the repayment of training costs was enforceable where the costs being recovered were proportionate to the actual loss suffered by the employer. In plain terms, this can be translated that the employer should consider what benefit it has obtained after incurring the training cost and which is then reflected in the amount it seeks to recover from the employee and over what period of time.
This highlights the importance of analysing each case on its own facts and including a provision which recognises the benefit the employer has received since the training has been completed. If the provision simply seeks to penalise the employee for leaving it is unlikely to be enforceable.
Is the clause a restriction of trade?
An obligation to repay training costs if an employee leaves their employment may have the effect of discouraging an employee to leave, and so be an indirect restraint of trade. The general rule is that restraint of trade clauses are unenforceable at common law. However, a court may decide to enforce a restraint of clause if it is considered to be reasonable, with reference to the interests of both parties.
When drafting such a clause, it is important to ensure that the clause does not unreasonably prevent an employee changing their employment if they wish and extends no further than necessary to protect the employer’s legitimate interests. What is a reasonable time period will, of course, be fact-specific, however, generally, the shorter the repayment time the greater the likelihood of a finding that the clause is reasonable and can be enforced.
- Repayment clauses should at least attempt to reflect the employer's loss and where possible a sliding scale of different sums payable will help show that this has been satisfied; and
- Employers should retain calculations as to how the sliding scale has been developed to show that it is in accordance with the estimated losses suffered.
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Employment Partner at JMW Solicitors LLP