Apprenticeship contracts: six expensive traps for the unwary

Apprenticeships are becoming a popular way for employers to train staff and, for those required to pay the Apprenticeship Levy, to get value for money from those contributions.

Our apprentice expert, Laura Willis, explains how to get the basics right when employing an apprentice, the risks of getting this wrong and some other interesting (and little known) facts about employing apprentices.

1. What type of contract should you use?  

Apprentices are generally employed in one of two ways:

• under a modern English Apprenticeship Agreement (or an Apprenticeship Agreement if you operate in Wales) under the Apprenticeships, Skills, Children and Learning Act (2009), (“ASCLA”); or
• under a common law apprenticeship agreement

There are specific provisions set out in ASCLA which you have to meet. If you don't get these right (or don't issue a contract at all), your relationship with the apprentice will be determined by the common law. And that's when it gets really complicated.

2. What rules apply to common-law apprenticeship agreements?

A contract of apprenticeship is a distinct legal entity at common law. Its principal purpose is to train the apprentice rather than to provide work for the employer and, because of that distinction, the normal rules that apply to dismissing employees don't apply. The contract is for a fixed term and you won't usually be able to terminate it before the end of that period.

For example, if you find that your apprentice is lazy or careless, you can't just give them notice and part company. In fact, you can only lawfully terminate their contract if you can show that their performance or conduct is so bad that it is impossible to train them. They have to be “essentially unteachable” which is very difficult to prove. 

Similarly, different rules apply to redundancy situations: you can only make a common-law apprentice redundant if there is a “fundamental change in the character of [your] enterprise”. This is a much narrower definition than that which applies to ordinary redundancies. 

3. What happens if we terminate a common law apprenticeship before the end of the fixed term? 

Enhanced damages

Unless one of the narrow exceptions apply, if you terminate an agreement early, you'll have to pay the apprentice: 

• damages for lost salary and benefits up to the contractual termination date of the apprenticeship; and
• enhanced damages for the loss of their future career prospects as a tradesperson or professional on completion of their apprenticeship.

The claim could, therefore, span the entire loss of their future earnings to an indeterminable date in the future, which can run into tens of thousand pounds.

National Minimum Wage liabilities and penalties

You may also incur penalties in respect of underpaying the national minimum wage (NMW). That's because common-law apprentices are not legally treated as apprentices under the NMW Regulations and have to be paid at the rates that apply to their age rather than the much lower apprenticeship rates. 

The current NMW rate for apprentices is £5.28 per hour, whereas the National Living Wage, which apples to employees aged 23 or over, is £10.42 per hour. Therefore, if a common law apprentice is receiving the lower NMW in reliance on their apprenticeship status, you will be underpaying them by almost half. 

The apprentice could recover this by bringing an unlawful deduction from wages claim in the Employment Tribunal. They could also elect to notify HMRC who have the powers to order an employer to reimburse employees for underpaid wages, charge interest and impose penalties of up to £20,000 per underpaid apprentice.  

Please note: any liabilities that you have under the NMW Regulations will apply irrespective of when the contract ends. 

4. Can we simply move our common law apprentices onto English Apprenticeship Agreements?

Potentially – but you need to be aware of the risks. 

Given that common law apprentices have implied rights to additional protections from dismissal (and, as a result, enhanced damages), simply issuing an ASCLA-compliant agreement will act to remove those enhanced protections and, therefore, will be considered a change in terms and conditions of employment. You will usually need the apprentice to agree to the changes and, to prevent problems further down the line, provide them with some form of consideration too (such as providing additional benefits or payment). 

Remember that if there are 20 or more employees affected by the change, you'll have to go through a formal collective consultation process first before making any changes. At the end of the that process, the employee may not agree to change their contract and the only way to impose it is to dismiss them and offer to re-engage them on the new terms. That amounts to a dismissal at law and the apprentice may decide to bring a claim for unfair dismissal (they'll need two years' service) and/or sue for enhanced damages.

We recommend that you take advice before trying to change common law contracts to minimise the risk of claims and having to pay substantial damages.

5. Can we end an ASCLA-compliant apprenticeship before the end of the fixed term?

Yes, but you need to consider the following first: 

Employees employed under an English Apprenticeship Agreement are fixed-term employees who are protected under the Fixed-Term Employees (Prevention of Less Favourable Treatment) Regulations, and they are also subject to usual unfair dismissal laws.

That means that, where they have more than two years’ service at the expiry date of the Apprenticeship Agreement, you have to follow a fair process before dismissing them, consider all suitable alternatives to dismissal and follow the ACAS Code, otherwise a dismissal may be deemed unfair.

In addition, there are some circumstances where termination of a fixed-term contract may amount to a redundancy situation, entitling an apprentice to redundancy pay.

6. Can we include a clause in the contract to recover training costs from an apprentice if they don't finish their training? 

Many ‘normal’ contracts of employment include some wording allowing employers to recover costs incurred on training or materials, for example, which are to be repaid (usually incrementally) in the event that the employee leaves or is dismissed within a certain period of time following the costs being incurred. Different rules apply to apprentices.

The Apprenticeship Funding Rules published by the Department for Education provide that an apprentice must not be asked to contribute financially to ‘eligible’ costs of training, regardless of when they leave their employment. These rules also set out a list of ineligible costs, which are a good indication of what an apprentice can be required to contribute to (even though it doesn't specifically address deductions).

In addition, section 109 of the Finance Act 2016 specifies that employers are prohibited from recovering any part of the apprenticeship levy cost from employees. But the Act does not address circumstances where an organisation uses its own funds to pay for training (for example where the activities are ‘ineligible’ for funding) and, therefore, it may be possible to recover these costs.

In Purcell -v- Winn Solicitors Ltd (2018), an Employment Tribunal upheld a contractual clause that required an apprentice to repay their employer its ‘full outlay’ in respect of the apprenticeship if the apprentice left the company before he completed the apprenticeship or within 12 months following completion. The Government funding rules in force at the time stated that ‘apprentices must not make any cash contribution for training that is specified in the standard or be asked to contribute financially to the direct cost of training or end point assessment for apprenticeship’. [The current position has been amended as set out above.]  

The Tribunal took the view that requiring an apprentice to repay training costs if they leave before completing their training (or within a set period afterwards), is not the same as asking an apprentice to contribute to the cost of training. It noted that the company had not asked the apprentice to contribute to their training and, if he had not left his employment, that training would have cost him nothing. The Tribunal went on to find that the repayment clause was not an unenforceable penalty clause. The Tribunal accepted that the company sought only to recover its ‘outlay’, which included paying the apprentice considerably more than the minimum rate normally applied to apprentices.

Our view is that employers can include a recovery of costs clause within the Apprenticeship Agreement for any outlay over and above anything covered by the levy and funded solely by the organisation, i.e. assessment fees, salary, expenses, etc. This is likely to act as a good incentive for apprentices to complete their apprenticeship. 

Need help?

We've developed a suite of products to provide you peace of mind at a fixed cost. 

We can: 

• conduct an audit of your current apprenticeship agreements and highlight areas of risk;
• provide you with a legally compliant new suite of apprenticeship agreements; and
• give you advice about how to introduce new contracts for apprentices engaged under common law contracts.

Please contact Laura Willis for further help.

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