ARE THESE CONTRACTS LEGAL – AND WHAT ARE THE RISKS IF YOU DON’T PAY UP? GRADUATE FOG ANSWERS ALL YOUR QUESTIONS
Disclaimer: The advice in this post is not written by a qualified lawyer. It aims to cover the most common questions we are being asked about exit fees. If you need help with your specific case, please contact a solicitor who specialises in employment law.
In the last 18 months, Graduate Fog has been contacted by around 40 graduate trainees who have signed contracts which include an ‘exit fees’ clause, stating that they must pay thousands of pounds if they quit their graduate scheme in less than a set period of time (often two years).
In almost all cases, the employer insists this money is to reimburse them for the sum they claim to have invested in your training. In most of those cases, the training is of such poor quality that this is hard to believe. In some cases, the employer demands that the full sum (up to £16,500) must be paid within 30 days.
We think that’s pretty outrageous — so we’ve teamed up with campaign group the Good Law Project (run by Jolyon Maugham QC) — to launch a legal challenge. The next phase of this is set to happen in April 2020.
So, things are moving — but that’s not much help to anyone who is currently feeling trapped on a scheme they’re desperate to leave, or who is being chased by their employer, who is sending nasty letters and massive invoices.
Shockingly, we believe that thousands of graduates may be in this position, across the UK. If you are one of them, it’s likely you’ll be considering your options. Should you stick it out, or escape and risk being chased for the huge sum that your employer says you owe? Will it affect your credit rating in future — making it harder to get a loan or mortgage? Here, we answer your questions…
What does the law say about ‘exit fees’?
The legality of exit fees is untested – but not for long. A test case involving a software company called Geeks Limited was heard in November 2019, and is due for a substantive hearing in April 2020. It seems that while there are scenarios in which it is reasonable for employers to ask a departing employee to contribute towards training costs originally covered by their employer, our legal experts at the Good Law Project suspect that the large sums demanded — and poor training provided — in these troubling cases are unreasonable, and place a higher-than-permitted burden on employees. However, Jolyon Maugham QC, founder of the Good Law Project, said that these principles had never been fully tested in court, telling the Financial Times why the Geeks case is so important. Maugham said: “We believe that these clauses are clearly unlawful but I can’t say that I’m absolutely certain that that’s so [until it’s been tested in court].”
Why are employers doing this?
Graduate Fog has concluded that these clauses seem to benefit employers in three ways. First, they scare young employees into staying, when you might would otherwise leave, saving the company money recruiting your replacement. Second, they allow companies to offer their clients a guarantee that they will have continuity of service, which is very appealing, especially for firms whose business model involves sending their graduates out to work on-site for other companies (for example, an IT contractor may send its graduates to work on-site at a big bank. The client may be guaranteed that that person will be there for two years, rather than being replaced by a different graduate every six months, say). And third, in the cases where graduates do quit, the employer may be able to frighten them into paying back some or all of the sum the employer claims is due.
Which companies are doing this?
Until 2018, outsourcing firm Capita were asking for £21,000 from departing graduates — but they stopped doing it after we began campaigning. Another big IT outsourcing firm called FDM — whose name you have seen on hospital appointment letters and voter registration reminders — are still doing it, charging departing graduates up to £16,500 if they quit their scheme in less than two years. Several other firms have demanded large exit fees from departing graduates, including Sparta Global, Geeks Limited and Ten10. Frontline — the government funded graduate programme for social care — also runs a similar system. Although Frontline graduates leave with a proper qualification, their stories about feeling ‘locked in’ to such harrowing work are deeply disturbing.
Are graduates paying these exit fees?
Maybe a few — but most graduates simply can’t afford to pay. This means that they are either sticking with the job until they can leave without being penalised, or they are quitting regardless, and hoping for the best. In some cases, the employer stops chasing them after a few months, and the graduates never hear from their employer again. In other cases, graduates are pursued aggressively for many months. Sometimes, the employer will go as far as taking legal action. There are several cases currently in the small claims court and employment tribunals, and some employers claim they have won county court judgements against graduates. We also know of several cases where a graduate paid part of the sum, but this was the result of pressure by the employer (scary letters and threats of legal action) but not from actual legal action. We know of many cases where a graduate’s final month of salary has been withheld by the employer, as a deduction from the sum that is supposedly owed.
So, what happens if I call my employer’s bluff, and quit?
First, we can’t say for sure that they are bluffing. Even if they’ve never taken anyone to court before, you could be the first. If you do quit, brace yourself. Expect to receive scary letters and massive invoices. We have seen dozens of invoices from FDM claiming that sums of up to £16,500 are due – payable within 30 days (!). These are accompanied by chilling correspondence from FDM and / or third-party legal representatives threatening departing graduates with legal action if they do not pay. You will be reminded that you signed a contract in which you agreed to these terms, and that you have benefited from the training they paid for.
So, should I just ignore the scary letters?
No — in fact, whatever you do, DON’T ignore them. Write back, saying you will defend (i.e. challenge) the action as the charge is an unlawful restraint on your freedom to work elsewhere, and the standard of training you received from your employer was poor, and it is not worth the value that is being demanded. You do not need a solicitor at this stage.
What will happen next?
Hopefully, they’ll decide not to bother to pursue you for the money, and you’ll never hear from them again. But they may choose to take legal action, to try and obtain a judgement requiring you to pay. If they do this, don’t panic. Write back again, saying you’ll defend yourself on the basis that the clause imposing the charge is an unlawful restraint of trade.
Wait — will all this affect my credit rating, or my ability to get a mortgage or other loan?
This is such a good question that we had to ask several experts. A representative from the Registry of Judgments, Orders and Fines told us that there are only two scenarios in which your credit score will be affected by your failure or refusal to pay exit fees to your former employer. The first is that you do not respond to their demand for the fees. Ignoring this could easily result in a County Court Judgement (CCJ) being issued against you by default (eek). The second is that your case gets as far as the court issuing a CCJ, and the judge says you must pay — and you then don’t pay. As long as you pay, the CCJ will be ‘set aside’ and won’t be visible on the CCJ register, or your credit report.
If there’s a chance that a court will say I have to pay anyway — should I just pay up now, for example by taking out a loan? This is really stressing me out.
It shouldn’t be necessary to take out a loan to pay this off, even if the worst case scenario happens and the court says you have to pay the full amount that’s due. This is because the County Court is likely to suggest a repayment plan that is far more reasonable than what your employer was suggesting. Rather than being told to pay the full amount in a short period, you’ll probably be told to make a small monthly payment over a much longer period of time. You’ll be paying this off for years, but it will be a small amount per month.
To be clear, if I get a CCJ (either by ignoring my employer’s letters, or by missing payments as instructed by the County Court) and it’s not ‘set aside’, that will affect my credit rating – right?
Right. We asked Helen Saxon, Banking Editor at MoneySavingExpert, who agreed that there was a serious risk that non-payment of exit fees could impact your credit score, in the scenarios you’ve outlined. She told Graduate Fog: “If you do get a CCJ [and it’s not set aside], it will be on your record for six years and visible to lenders searching your credit report. It’s reasonable to assume in this case that it could affect your ability to get a mortgage or other loan.”
How likely is my employer to go as far as applying for a CCJ to pursue the debt that I supposedly owe?
It’s hard to say. Unfortunately, we know that several employers — including FDM — have sued graduates. However, other FDM graduates have eventually been left alone, following numerous nasty letters from the firm, which appear to be designed to intimidate them into paying up without getting as far as court.
If the test case against Geeks Limited in April 2020 is successful, would that mean all graduates could immediately be released from contracts which state they can’t leave without paying exit fees?
Not quite — but it would definitely be good news for anyone trapped by a contract which includes an exit fees clause, or anyone who is being chased, having recently left their employer who insists they owe exit fees. As Jolyon Maugham QC explains: “If the court finds against Geeks and in favour of the graduate, that should make it harder for other employers. The value of the April case will depend on whether the Court agrees with us, how well argued its judgment is, and how widely we can disseminate it. But it won’t be formally binding.”
And how would it impact graduates who are already repaying exit fees as part of a payment plan either as instructed by a CCJ or through a private agreement?
The Good Law Project has had a very early stage discussion with a firm looking at the possibility of class action against these employers to recover unlawful training fees graduates may have paid. This may be easier for those paying fees under a private agreement (rather than those who have been ordered to do so by a court).
How would it impact graduates who have already paid back exit fees. Could they reclaim what they’ve paid?
See above. These are very early stage discussions but if private agreements are unlawful it may mean ex-employees have restitutionary claims (in other words, there is a chance you may be able to get your money back).
My ex-employer has gone quiet and is no longer chasing me for the money. Can I reclaim the final month of my salary that they’ve held on to?
Hmm. You almost certainly have the law on your side. On the other hand, the employer may try and counter claim for the rest of the monies they allege are outstanding. It’s up to you, but on balance we’d say that for a grand or so it’s probably best not to kick the hornet’s nest.
I haven’t left my graduate scheme yet, and you haven’t answered my question… Should I stick it out until the end of the agreed period, or quit and risk being chased for the money?
We’re really sympathetic to your plight — we’ve put a LOT of unpaid work into helping graduates in this situation! — but we simply can’t tell you what to do. You have to make that decision yourself, having read the information above and weighed up the risks and benefits of each option.
I have a question you haven’t answered — can I email you about it?
Sorry, there’s no point! We’ve included everything we know in this post — and we can’t advise graduates on individual cases as we are simply not qualified to do so. We suggest you find a solicitor who specialises in employment law, and show them this post as a starting point. We’ll post again when there is an update on the Geeks case in April. Best of luck!
Are there any graduates that you DO want to hear from?
Yes — if you’ve left in the last few months and have had a final payment deducted from your salary, please get in touch.