Recouping expenses, like training-related expenses, from departing employees can be tricky. As many employers are aware, contractual provisions that penalize a departing employee will generally not be enforced by the courts. In addition, if a contractual clause looks like it’s actually trying to restrain an employee from competing with similar businesses, courts are similarly unlikely to enforce them for being in restraint of trade.
Having said that, there are some situations where courts will allow an employer to recoup amounts from departing employees. In fact, in a recent case out of Ontario, Renaud v. Graham, the court affirmed a lower court’s decision that required an employee to reimburse his employer for training-related expenses (i.e., courses, materials, etc.) and for wages he received while he was training to be a real estate agent.
In that case, Ian Graham approached a successful real estate business in Ottawa, Renaud-Otten, and was hired despite not having training or a license in real estate.Â Renaud-Otten agreed to pay Graham a base salary of $40,000 as an “unlicensed sales assistant” while he trained and studied to become a licensed real estate agent. Renaud-Otten would also employ Graham as a Realtor once he became a licensed Realtor.
The arrangement was unusual because real estate firms often only hire individuals once they have their license, and so Renaud-Otten drafted an agreement to protect its “investment” in training Graham.
The contract included two special provisions:
- If Graham commenced work with another real estate company within one year of leaving Renaud-Otten, he would have to return one month of wages (but not bonuses) for each full month between his first and last date of work with Renaud-Otten. The provision explicitly stated that this amount would be payable by Graham in order to compensate his former employer for “the costs of training” him in the first six months of his employment. On Graham’s suggestion, the maximum he would be required to pay under this clause would be $20,000.
- Graham would have to reimburse Renaud-Otten for out-of-pocket expenses incurred for training him in the year prior to his departure, including course fees, airplane tickets, hotels, and meals.
The parties signed the agreement, which would last for three years.
So after six months of working with Renaud-Otten, when Graham decided to work for a competitor, Renaud-Otten requested that Graham honor the terms of the agreement and pay back:
- $20,000 in wages; and
- training-related costs in the amount of $3,387.14 (including fees and expenses for a “Star Power” course Graham had attended in Boston).
When Graham refused, Renaud-Otten sued him.
At trial, Graham’s lawyer argued that the clause requiring Graham to repay wages was really a restraint on trade/noncompetition clause. But the trial judge disagreed. He said that the clause “â€¦does not purport to prevent [Graham] from working in the real estate industry. He is free to do so, when, where and with whom he pleases. To the contrary, the clause actually contemplates what will happen if he does work elsewhere in the real estate industry.”
Even more interesting, the trial judge said that the clause was actually “favourable” to Graham given that he was only required to repay wages if he worked for another Realtor within one year from his last day of work with Renaud-Otten. In addition, the court said that the $20,000 repayment was enforceable because it represented a proper assessment of Renaud-Otten’s damages in the event that Graham left before the end of the three-year agreement.
Similarly, the trial judge found no reason to interfere with the provision requiring Graham to reimburse Renaud-Otten for the out-of-pocket expenses, including for the “Star Power” course.
The trial judge’s decision was unanimously upheld by the Ontario Court of Appeal. The court applied reasoning from Nortel Networks Corp v. Jervis, which stated “[w]here a former employee is required to forego a benefit if he or she chooses to compete, that is not in restraint of trade.” In this case, not only had Graham received training to become a real estate agent at no cost to him, he was also paid by Renaud-Otten during his training period. The Court of Appeal also agreed with the trial judge’s decision that the $20,000 maximum was not a penalty clause, but a “genuine pre-estimate of damages.”
This case is interesting because it highlights what a court will tolerate from an employer seeking compensation from a departing employee. Although a restrictive covenant such as a noncompetition clause may be problematic, when an employer can show that a repayment is not a penalty and that it is based on a genuine estimate of .loss, the courts will allow the employer to collect. If you’re considering implementing clauses like the ones in Renaud v. Graham, just remember that:
- the contractual language setting out the obligation must be clear; and
- the amount(s) must be connected to a true estimate of damages. Attempts to recoup extra amounts will likely be deemed a penalty and not enforced by a court.
Contact the author, Sara Parchello