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Repayment of training costs – is it legal?

Having a well-trained workforce is in everyone’s interest – the employers, the employees, and for the good of the economy as a whole. Employers have long invested considerable sums on training their workforces, but as the cost of training courses rises, and as employees tend to move jobs more often than in the past, many employers are reluctant to invest large sums in training employees who may then move on and possibly let a competitor benefit from the skills the employee has gained. One way of reducing the risk of employees leaving soon after they have been on courses, or at least to reduce the financial cost of them leaving, is to require the employee to repay some or all of the training costs to the employer.

We are frequently asked to draft this type of agreement for employers and to advise on whether they are enforceable. As usual, the answer to the question of whether the agreement is enforceable is that it will depend on the circumstances, and on how well the agreement has been drafted. The enforceability of an agreement to repay training costs can really be challenged on two legal bases: first, because they are a penalty clause, and second because they are in restraint of trade. I will look at each of these in turn.

Penalty Clause

In law, a provision that a party to a contract has to pay the other party to the contract a stipulated amount in the event of a specified event, for example, a breach of contract or an employee leaving their employment, will only be enforceable if the amount that the party has to pay is a genuine pre-estimate of the other party’s loss. In terms of the effect of this doctrine on an agreement for the repayment of training costs, it will be for the employer to show that the amount they are asking the employee to repay is a genuine pre-estimate of their loss.

For example, if an employer sends someone on a course that costs the employer £2,000, and the employee leaves their employment immediately after the course finishes, then the employer has received no benefit from their investment and, with a properly drafted agreement in place, could legitimately recover the £2,000. If however, the employee left their employment after say 3 years, then clearly the employer has had the benefit of the training for 3 years, so if they sought to recover the £2,000 then that would be unenforceable as it would not reflect the employer’s loss. It would also be likely to be unenforceable as being in restraint of trade and we will look at that below. If, however, the agreement is properly drafted, then the employer will normally be able to recover a proportion of the cost on a scale that reduces over time so that after, say, 1 year from the course finishing they would have to repay 50%, and after 2 years nothing. The figures in the sliding scale will depend on the costs involved, and this is something we can advise on when drafting agreements.

In some cases, employers seek to recover costs for “on-the-job” training, and this is far harder for them to quantify the cost of this. It has been reported that some large firms, such as Capita and FDM, are putting some employees through training schemes which cost very little, but which the firm is requiring people leaving their employment after completing the courses to repay much larger sums, reportedly up to £18,500. On the face of it this would be a penalty clause, and also in restraint of trade, and therefore would be illegal and unenforceable. We understand that a legal challenge to these types of clauses is being launched.

Restraint of Trade

As stated above, the other basis on which a repayment of training costs provision may be unenforceable is if it is in restraint of trade. The courts will permit employers to protect their legitimate business interests by, for example, enforcing well-drafted and reasonable post-employment restrictions, but they will not allow employers to unreasonably prevent an employee from changing their employment if they wish. Training course repayment provisions, even where they are a genuine pre-estimate of loss, can still be void as being in restraint of trade if the effect of them is to prevent the employee from changing jobs. Certainly, it seems likely that the sorts of provisions reportedly put in place by the likes of Capita would have the effect of preventing employees from leaving their employment, so may well be held to be unenforceable.

Please note that this update is not intended to be exhaustive or be a substitute for legal advice. The application of the law in this area will often depend upon the specific facts and you are advised to seek specific advice on any given scenario.

If you have a question about this or any other employment matter please contact our Employment Team