Recovery of training costs from clients by employers — when it may be unlawful and options for challenge

Christine Peacock examines the situations in which employers can recover training costs from workers.

It is becoming increasingly common for workers to seek advice in cases where employers have made deductions from their pay, or propose to recover money it is said the worker is liable to repay, in connection with their training costs. This is typically when employment has ended. Many of these workers are low paid or in otherwise precarious employment situations, with the sums in question being substantial ones in many cases. This article considers the circumstances in which employers can lawfully make deductions from a worker’s pay for such costs, or might be entitled to recover training costs through other routes, and looks at the options for challenge available to workers in these circumstances.

Deduction of wages

Typically, the simplest way in which employers seek to recover training costs from workers who are ending their employment is through the employer withholding from final pay the amount said to be due because the employer has incurred training costs on the worker’s behalf. If final wages do not cover the amount claimed, this is accompanied by a demand for repayment of the outstanding balance along with a threat of legal action if this is not paid within a specified period.

When deductions are made a worker may be able to pursue the matter as an unlawful deduction of wages. This is likely to be the most common query advisers will encounter, focusing on the employer’s right to do this.

Advisers will generally be aware of the limits on an employer’s right to make deductions from wages (set out in the Employment Rights Act 1996 s13), these being permitted only in certain circumstances. The ‘excepted deductions’ (those which can lawfully be made) are found in s14 ERA. Of most relevance to this situation are likely to be where there is a ‘relevant provision’ in the contract authorising such a deduction, or when previously agreed in writing by the worker. A first step when a deduction has been made will therefore always be to check whether there is a contractual provision permitting a deduction or whether the client had signed some kind of training costs repayment agreement before the deduction was made. If it is clear that no such provisions exist and the deduction has just been made from the worker’s pay then the client is likely to have a claim for an unlawful deduction of wages which can be pursued in the employment tribunal. The usual three month time limit will apply, with the first step being to contact Acas, and the best outcome usually being that the dispute can be resolved through Early Conciliation.

If that time limit has been missed the client might alternatively have the option of bringing a breach of contract claim (in the small claims track of the civil courts), although that would enable the employer to make a counterclaim if any other contractual matters are in dispute.

If there is a contractual term permitting a deduction, or the client has signed some kind of agreement, the employer may well have a defence to an unlawful deductions claim. However it is vital to check the wording in either situation to establish whether the client’s circumstances are covered.

Is there a training costs agreement and what does it say?

The mere existence of a clause or some signed agreement won’t be sufficient to establish the employer’s right to deduct from wages (or recover) — the terms of the agreement need to be considered carefully to see precisely what it says. For instance, where an agreement states that the client is required to repay training costs ‘incurred’ by the employer, the employer must be able to calculate and evidence what costs have actually been incurred, and that they were related to the client’s training if they are to rely on this. If for example, college fees were paid by a grant, the employer would not have ‘incurred’ those costs and so they would not be recoverable under the agreement.

Clients should be advised to ask their employer to provide an itemised breakdown of costs. If the employer refuses, a good tactic is to follow up with a Subject Access Request (see the Information Commissioner’s Office guidance on this: Your right of access | ICO)

The employer’s breakdown should be scrutinised — for instance a client may be charged for room hire where the employer has actually used its own premises to deliver training.

Many repayment clauses in a contract will specify that the obligation to repay is only triggered if the worker does a certain thing, such as resigning within a certain period of time. So the time period needs to be checked. In addition, if the obligation to repay no longer applies after a certain length of service, the courts have held that there is an implied term that if it is the employer doing something ‘of its own initiative’ to prevent the worker from gaining the required length of service, repayment is waived (unless, for example, the dismissal was justified because of something such as dishonesty) (Ali v Petroleum Company of Trinidad and Tobago [2017] IRLR 432; Ali v Petroleum Company of Trinidad and Tobago).

Did the agreed training actually take place?

If the client didn’t get the training promised, then the employer will not be entitled to recover the cost of it. In one case, (MBL UK Ltd v Quigley UKEATS/0061/08/BI;) an employee was required to pay £500 towards ‘structured and on-the-job training’ if he left employment within a certain period. His evidence was that he had been given induction-type training of a general nature (such as being told what the company expected of him) while the employer gave no evidence of the cost of any structured training it had provided. The Employment Appeal Tribunal held that the term only applied if the employer showed they had provided training of that type and to the value indicated.

Advisers will need to be alert to this and to consider what evidence there is of the extent and nature of the training provided to the client before advising about the likely liability of the worker for the costs claimed.

Is the amount being claimed void as a penalty clause?

A penalty clause is one in which the employer says in a contract:

• if you breach your contract you will have to pay me £x in compensation, and
• the specified sum is out of all proportion to any ‘legitimate interest’ the employer has in trying to ensure that the contract is not breached. The sum will be disproportionate if it is ‘unconscionable, extravagant, exorbitant or incommensurate’ when compared to the needs of the employer to protect their legitimate interest.

If the amount claimed for any breach in these circumstances can be regarded as, effectively, a penalty, then this term would be void and unenforceable. It is worth advisers being aware of this argument, but it may be difficult to rely on this argument with any certainty, not least because the leading cases on the enforceability of penalty clauses in contracts have not been in an employment context.

The difficulty in relying on this argument in relation to training costs is that:-

• the employer is not really saying that the specified sum is payable for a breach of contract. The client is not in breach of contract by resigning from their job — they haven’t promised that they will stay for the term specified, just that if they want to leave they must pay the agreed sum. If the clause is not imposing a fee for breaching the contract then the client cannot rely on the penalty clause argument to challenge it.
• even if clients can get over that hurdle, the employer is likely to say that it has a ‘legitimate interest’ to ensure that staff do not become trained up at their expense and then take that training elsewhere — they want staff to stay long enough that they get a return on their investment. If the employer is genuinely claiming back the cost to them of the training then it may be the case that they could seek to justify it. Some employers have ‘graduated recovery’ clauses so that the sum reduces over time. That doesn’t necessarily mean it is proportionate, but it goes some way towards showing that it is not wholly disproportionate — it acknowledges that the employer is getting a return on their investment.

If the costs are excessively high/disproportionate to the ‘training’ the client got, then arguably they do not represent a genuine pre-estimate of the costs to the employer of training. When awarding compensation for breach of contract courts do not allow parties to make a ‘windfall’ in excess of the loss they actually incurred. For instance, is the client being asked to pay for the entire course even though they left before finishing it, or is a significant sum being charged for some basic online training? If so, the clause may be unenforceable.

However, any court or tribunal would take note of the fact that, in an employment context, the parties usually have very unequal bargaining power, meaning that it may be more difficult for an employer to enforce an apparently disproportionate sum claimed for training costs against, for example, a low-paid care worker.

Deduction or right to recover

In circumstances in which either the contract makes reference to repayment of training costs, or where the client has signed a separate agreement, it is important to check whether the wording amounts to specific authority to recover any outstanding amount for training costs by way of a deduction from the client’s wages. If a contractual clause simply provides that the worker will be liable then this is unlikely to be sufficient to authorise a deduction, usually from final pay, even if the employer may have a right to seek to recover through the small claims court any amounts due.

The case of Potter v Hunt Contracts Ltd 1992 ICR 337, EAT, relating to outstanding sums due for the costs of an HGV driving course, is a particularly helpful one to cite if the wording of the agreement does not give that clear authority to deduct. If a deduction is made in these circumstances, when an agreement to repay is specified, but with no clear authority for the employer to take this from the worker’s pay, this would enable the client to pursue a claim for an unlawful deduction of wages claim in the Employment Tribunal.

In addition, if a deduction is made from final pay which covers only part of an amount due for repayment of training costs, leaving a balance still outstanding which the employer is asking the client to repay, and the tribunal finds that an unlawful deduction from wages for the initial sum was made then this reduces the amount due to the employer. The employer could still choose (if cost effective) to try to recover in the small claims court the balance it says is due, but it would be barred from trying to recover through this route the sum initially deducted unlawfully from the client’s wages.

For example:

The employer may say £800.00 is due for training costs, and the worker’s final week’s pay should have been £370.00. The employer might withhold all of the final wages and say the remaining £430.00 is still due to be repaid.

If the worker wins a tribunal claim (on the basis there was an agreement but which did not give authority to deduct from pay), the employer has to repay the £370.00 unlawfully deducted. But if they then decided to sue the worker in the small claims track of the county court (on the basis that there was an agreement that training costs could be recovered) it is only the £430.00 balance for which the employer could claim.

Might the effect of recovery mean that the worker will be paid less than the National Minimum Wage (NMW)?

Even if the costs appear due, a deduction from wages for training costs could have the effect of taking a worker’s wage below the NMW, putting the employer in breach of the NMW.

The National Minimum Wage Regulations 2015 permit certain deductions to be made from wages without those deductions reducing the pay taken into account for NMW purposes. However, other deductions are treated as reductions (reducing the total pay used to calculate the hourly rate paid) for NMW purposes. Case law on this point has conflicted but the case of Revenue and Customs v Ant Marketing Ltd UKEAT/0051/19/00 is helpful for clients, particularly those on low pay, in that it decided that mandatory training costs (even though previously authorised by a written document) were caught by the NMW, meaning that these should be treated as reductions. This resulted in pay being wrongly taken below the NMW when deducted.

What this means in practice is that if the client’s training was compulsory and a condition of employment it is likely to be caught by Reg 13 (NMW Regulations), as a deduction made ‘in connection with the employment’ (just like, for example, deductions for uniform or tools). Advisers should check the client’s contract for terms to the effect that failure to undertake training could result in dismissal or discipline as evidence to indicate that it is mandatory.

If, however, the training took place prior to employment starting, this may have the effect of meaning the costs fall outside the pay reference used for the NMW.

If the training was optional, and the client entered into a contract with the employer to repay the costs, then provided the reason liability to repay was the ‘conduct of the worker, or any other event’ (such as dismissal for misconduct, or straightforward resignation of the worker) then the deduction will not reduce pay for NMW purposes (Reg 33(a) of the NMW Regs 1999). In Revenue and Customs v Lorne Stewart plc UKEAT/0250/14/LA the Employment Appeals Tribunal decided that ‘any other event’ means an event that the worker should in some way be responsible for, such as a voluntary resignation.

Advisers should be aware that if the client has been paid less than the NMW, they can ask HMRC to take enforcement action against the employer (Complain about pay and work rights — GOV.UK), or bring an employment tribunal claim themselves (for an unlawful deduction of wages, based on failure to pay the NMW).

Conclusion

Once the checks discussed above have been undertaken, the client has few options if it seems the sum may be recoverable. One is to accept that the authorised deduction from final wages has been made but if that does not cover the sum due, to simply wait and see if the employer actually starts county court proceedings to recover the balance. They may never choose to do so, as this can often not be cost effective for an employer, particularly where the client is unlikely to be able to repay, and where there may not be certainty that they would win the case.

Another option is to suggest to the client that they accept they owe the money but negotiate for a reduced sum (where possible with the adviser’s support), or offer to make payment in affordable instalments. When taking into account the arguments set out above, if there is reason to doubt whether the sum claimed is repayable, it may be worth assisting the client with an initial letter to the employer and, depending on the grounds claimed, incorporating one or more of the paragraphs below (amended as necessary to fit with the facts of the case). However the client will always need to be aware that, certainly in relation to penalty clauses, there cannot be certainty that the legal arguments used would succeed. But as the client may have little to lose in pursuing the argument, when compared with quite significant sums claimed by the employer, it may still be worth challenging.

Although an increasing trend is developing towards employers inserting terms into the contracts of quite low paid workers to authorise deductions from pay for training costs, or requiring prior agreement to liability to repay these costs when leaving employment, this article sets out the important points for advisers to check first when advising clients. The right to deduct, or obligation to repay, may not always be so straightforward and may still be capable of challenge.

Sample paragraphs

Penalty clauses:

Use the following paragraph in any letter to an employer seeking to recover significant/disproportionate sums for training costs where the argument used relies on this being a penalty clause:

You are claiming that I owe the business £x because of costs incurred in providing me with training and I am now leaving [or have left] the company. However, I have got some advice about this and I cannot see how the sum you say I am liable to repay is a proper reflection of the costs of the training I received. [Set out here the reasons why e.g. All I received was a few hours of online training but you are asking me to pay £x and I cannot see how that sum has been calculated, and so it seems to be out of proportion to the costs of training me; or

I have worked for the company for x years since completing the training and yet you are asking me to repay an amount which seems to me to be more than the costs of that initial training, although no proper breakdown has been provided for me to be able to do that calculation accurately].

In the circumstances I believe that this is not a genuine estimate of the costs incurred or any losses to the business, and is disproportionate. I therefore think that you are imposing a ‘penalty clause’ which is unenforceable, meaning that I am not liable to pay the £x amount claimed.

Unlawful deduction:

Use the following paragraphs (as appropriate) in any letter to an employer challenging a deduction from wages where authority to deduct is disputed:

I understand you are claiming that I owe the business £x because of costs incurred in providing me with training [provide any necessary extra details of the training and sums in question]. Because of this you have deducted £x from my final pay. However, [insert either]:

• There was no agreement that these costs, or a proportion of them, were repayable if I left, and I have not given authority for any deduction to be made from my wages in relation to repayment of training costs.

OR

• I understood there may be circumstances in which I could be asked to repay a certain amount of my training costs [insert details here of any written agreement or contractual clause about repayment]. But I have never given any authority for sums to be deducted from my pay to repay training costs.

In the circumstances I think that you are not entitled to take this money out of my pay and there has been an unlawful deduction of my wages. Please refund this sum to me [within 14 days] or I will have no alternative other than to contact Acas about this and, if necessary, start employment tribunal proceedings.

Christine Peacock is an Employment Expert in the Expert Advice team at Citizens Advice.

This article also acknowledges the research contributed by Stephanie McKeon, former member of the Expert Advice Employment Team.

The information in this article is correct as of the date of publication.

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