Paback clause is a legal instrument that allows employers to bind employees for a certain period of time in compensation for the employer’s investment in employees’ training. In fact, employees are free to move to another company but if they terminate the employment relationship within the agreed retention period they can be requested to reimburse (a share of) the cost of training.
Payback clauses should increase employers’ investment in training as their risk of paying for employee training, yet not profiting from it, is decreased. In turn, employees are expected to profit from employers’ increased readiness to pay for training, in particular when learning outcomes also have market value beyond the current employer.
Within the freedom of economic parties to conclude contracts, payback clauses are principally possible as part of or in addition to any employment contract as long as principles of fairness and appropriateness as stated in civil law are not violated. However, given the imbalance of power between employer and employees, the possible range for payback clauses is typically limited by formal regulations of various kinds, including labour codes, rulings by relevant courts (in particular, labour courts) or binding collective agreements at sectoral or regional level (NB: most of the labour codes allow amendments of regulations at sectoral level through collective agreements or at company level, provided the conditions are more favourable for employees than those established in national statutes).
Limitations put in relation to the use of the payback clauses may concern the following issues (Cedefop 2012):
- Minimum amount: payback clauses might only be valid, when training costs exceed a certain minimum amount. Alternatively, another threshold might be used (e.g. the duration of training).
- Depreciation over time: typically, the amount to be paid back decreases over the agreed (retention) period. The depreciation is equal to similar approaches for investment goods, assuming that skills acquired lose value over time. Moreover, employers are expected to profit from their investment over time.
- Maximum contractual retention period: payback clauses are not valid for any period longer than a set number of years. In addition, it is often specified that the period must not be inappropriately long regarding the duration/costs of the training.
- Valid reasons for asking for a refund: payback clauses are to be applied only when employees leave voluntarily or are dismissed for misbehaviour. However, there are cases where the non-completion of training is also a possible reason.
- Eligibility: payback clauses are usually applicable to all employees, although employees on fixed-term contracts are often not covered by payback clauses. Usually labour codes allow the use of payback clauses for general (transferable) training. For firm-specific training that is directly related to current or future work tasks within the company, the employer usually bears 100% of the cost of training and no reimbursement is enforceable if the employee leaves the company (shortly) after training (a mixed form, where reimbursement of training costs can be requested for both general and firm-specific training, exists in the Netherlands).
Distribution of payback clauses in the EU