Can an employee be legally tied to a company? And can they be forced to repay training costs? Mark Leach attempts to untangle this contractual knot.

The question: Could anyone assist me please? I am looking for formatted and current advice regarding restrictions upon employees who for example may have signed or who may have been asked to sign an agreement when taking training or upon joining a company, that can tie the employee to a particular company, by a time or monetary restriction, I would like to understand current thinking upon what is right and permissable.

Mark Leach, a partner at law firm Weightmans replies:

You seem to be asking two separate questions, firstly in relation to employee contracts and whether you can be tied to a company upon joining by a time or monetary restriction? Secondly can you be forced to pay a company back for training that has been received?

In answer to your first question an employment contract will tie an employee to an employer for the length of the fixed term or notice period. Employment contracts are either for a fixed term or have a period of notice. Should the employee refuse to honour their fixed term or notice period, then they would be in breach of contract unless their early departure was because of a serious breach of contract by the employer (a constructive dismissal claim). Sometimes employers will agree to releasing an employee early but in the absence of agreement, the employee runs the risk of a civil claim by the disgruntled employer.

As far as a monetary restriction is concerned then a departure may have adverse monetary implications for an employee. One potential implication, the refunding of training fees, is considered below. There are other possible restrictions, such as a term which only pays an annual bonus if the employee remains in employment at the end of the financial year, share option schemes which incentive employees to remain in employment until a date in the future when their options can be exercised. These types of 'tie ins' are generally regarded as legal. It is crucial that the terms of the contract of employment are properly considered before an employee decides whether and when to resign.

In answer your second question, there are increasing demands upon employers to provide regular, quality training to its employees. Training is frequently an expectation and sometimes a professional/occupational requirement. A key question is whether training costs can be retrieved from an employee who leaves shortly after or even during training. Is it unreasonable for an employer to recover expensive training costs?

Employers are increasingly requesting total or partial recovery of training fees from employees who choose to leave. The employer will argue the cost of the investment which was wasted on an employee who has resigned and - worse - that the employee should have considered the cost to the employer and their intention to resign before they agreed to participate in the particular course. In turn, employees will argue that no job is for life in the 21st Century and that most jobs require an element of investment in, and training of, employees.

Employers may well be able to recover costs from employees if the issue is reasonably handled. The starting point is that training costs 'wasted' on an employee will not normally be recoverable unless expressly agreed in writing with the employee prior to the commencement of the training.

The agreement must be drafted carefully to be construed as a 'liquidated damages clause' (which is enforceable) rather than a 'penalty clause' (which is not).

Crucially the employee must have agreed, in writing, the terms. Otherwise there is a significant risk of a claim to an employment tribunal for unlawful deduction from wages, when the final salary payment has had the training fees deducted.

There are no set rules as to what may be agreed. However there are some helpful general principles.

The agreement must be a 'genuine pre-estimate of loss' which would be suffered by the employer, contemplated at the time of agreement rather than at the time of the breach. The agreement must not be an 'extravagant or unconscionable' penalty.

A clause providing full recovery of course fees even in the event that employee resigns, say 10 years later, would be a penalty clause. It would not seek to place limitation on the employer's right to recover damages for actual loss. The benefits of the course would have been realised in the years of employment following the course and the employer will have had that benefit.

A much more limiting clause was considered in the case of Strathclyde Regional Council v Neil [1984] IRLR 11. Here, a provision in the employee's contract required her to refund a sum calculated on the basis of her salary, course materials and examination fees if she left within two years of completing a study course paid for by the local authority.

This was a liquidated damages clause because it represented genuine loss to the employer, contemplated at the outset. The clause only sought recovery of the cost of training the employee and was proportionate to the unexpired portion of the two year period. The clause was upheld as valid.

One final thought is that this type of clause may also be considered as a 'restraint of trade'. Ultimately, validity comes down to reasonableness and proportionality on a case by case basis. However, a clause which is significantly limited in time and possibly one which provides for a sliding scale of recovery (so acknowledging as the months go by that the employer will have gained some benefit from the employee's attendance on the course) ought to stand the test of reasonableness.

Mark Leach is a partner in the employment team at Weightmans solicitors and has particularly strong expertise in collective employment issues such as industrial relations, outsourcing and restructuring.
For more information go to: www.weightmans.com