Last year, the UK Government announced increases in fees for immigration and nationality applications as well as priority processing services which took effect from 4 October 2023.

As mentioned in our previous article, these increases are substantial and likely to have a significant financial impact for applicants and their sponsors. In addition, the UK Government are increasing the Immigration Health Surcharge shortly on 6 February 2024.

To mitigate against the rising costs associated with sponsorship, it is becoming increasingly more common for employers to ask sponsored workers to sign up to clawback provisions, as often seen with training costs. Clawback provisions are usually either found in the employment contract or in a standalone agreement signed by the employee. 

The principle behind these provisions is to allow employers to attempt to recoup some or all of the costs incurred during the sponsorship process in the event the employee resigns, is dismissed or simply has second thoughts about starting the role altogether. Offsetting some of this financial risk with clawback provisions allows employers to continue to choose from a wider labour market rather than concentrate solely on those with settled status. It is not without its own problems though and careful consideration will be needed when drafting to avoid the clawback becoming unenforceable if challenged by the employee. 

What can be recouped?

Firstly, employers need to be aware that not all costs associated with the sponsorship process can be recouped. The Home Office has made it clear that the Immigration Skills Charge (ISC) must not be passed on to a migrant. The ISC is either £364 or £1,000 per year depending on the size of the employer and the length of sponsorship. Some situations, where a sponsored worker leaves earlier than expected, might give rise to partial repayments but this tends to be limited.

Other costs which are often excluded from clawback provisions is the fee associated with the Certificate of Sponsorship (now £239 for a Skilled Worker visa) and the fee paid by the employer when making the sponsor licence application (or renewing the licence) as these are costs which should be borne by the employer.

There is also some doubt over whether an employer can include legal fees incurred in relation to the visa application in a clawback agreement given the levels of fees involved. These fees are usually an agreement between the employer and its advisers and is not set by the Government, unlike the visa application fees. It could be seen as unreasonable and therefore a ‘penalty’ to recover these.

What are the benefits of clawback provisions?

Having clawback provisions in place enables an employer to protect their investment into the sponsored worker and ensure there is a deterrent in place to discourage the sponsored worker from leaving the employer earlier than expected. 

For sponsored workers, it enables them to obtain their visa and work for the UK employer without being out of pocket by having to pay the immigration fees upfront. It also provides some transparency and security for the employee, having clear written provisions provides clarity and certainty for both parties. 

What are the disadvantages of clawback provisions?

Employers need to be careful that the clawback provisions are not seen as unfair or unreasonable as an employee could challenge the provisions in court. If challenged successfully, a court could find that the clawback provisions are akin to a penalty on the employee and the employer loses the protection. 

From an employee perspective, they impose a financial liability on the employee which restricts their ability to move jobs. Employees may find themselves in a financial trap, particularly in sectors such as the care sector where employers tend to have clawback provisions in place. This could also potentially give rise to national minimum wage concerns. 

If not drafted carefully by an employer, the provisions could be unclear or ambiguous which could result in disputes over what the employer can legally recoup on termination. This in turn could have an effect on an employer’s reputation and may put prospective non-UK national candidates off from applying to work with the employer.

What employment considerations should an employer take into account when putting in place clawback provisions?

Employers need to ensure that any clawback provisions are drafted carefully so if their enforceability is challenged, the employer can defend its position.

Some key employment considerations are:

• Employers need to consider the duration of the clawback provisions and what amounts will be recovered on termination. The provisions should specify the exact amount and the period of time that the clawback applies and should reflect the actual fees paid by the employer. 
• Whilst untested in the courts for immigration purposes, employees may seek to argue clawback provisions as a penalty and are therefore unenforceable. The enforceability of clawback provisions is strengthened when the amount to be repaid is proportionate to the employer’s loss. This is why we often, and sensibly, see sliding scale provisions which recoup a gradually reducing percentage of the costs in line with the length of the employee’s service. In short, the longer the employee stays with the business, the less they would repay when they leave. 
• Employers may also want to consider if a clawback provision is appropriate in all situations where employment ends. For example, the employer may decide the clawback will not apply in the event the employee is made redundant or dismissed for ill-health capability. In the interest of fairness and to assist with enforceability, an employer needs to consider whether any reasons for termination need to be carved out of the provisions.
• Employers should also ensure they have the employee’s written consent to deduct the outstanding clawback amount from their wages or final pay on termination to avoid any unlawful deduction of wages allegations. In the absence of express consent to deduct these costs, the only option for the employer would be to pursue the employee for the debt in separate litigation which is a time consuming and costly process. Typically the clawback provisions will either be a clause in the employment contract or in a separate side letter so employers should ensure that these documents are clear that the employer has authority to deduct from final pay for these costs.

In addition to the above, clawback provisions for immigration fees will predominantly affect non-UK nationals. Employers also need to ensure that they are consistent with the implementation and enforcement of clawback agreements to avoid challenges on the basis of differential treatment.

Are there any tax considerations?

There are also tax considerations when relying on clawback provisions:

• Where employers meet the costs of visas and certain immigration fees for employees based in the UK, these costs could be liable to income tax and National Insurance contributions depending on how the employer pays the costs e.g to the individual directly.  In some circumstances, a tax deduction or exemption may be available for employees applying for their visa from outside the UK. For example, in the case of employees applying outside the UK, their visa costs may be travel related (depending on the circumstances) and therefore eligible for a tax deduction. Whether any tax deductions or exemptions apply should be checked on a case by case basis so it is best to seek advice.
• If the employer claws back certain immigration fees on termination of employment, this repayment might result in “negative earnings” for the employee and the employee may be eligible for income tax relief or a tax refund from HMRC. This typically only applies where the right to claw back arises directly out of the employment. This is likely to be the case when it comes to visa fees as the right will be in the employment contract or associated employment documents as mentioned above. Ensuring the legal documents containing the clawback provisions are up-to-date and fit-for-purpose is therefore important.
• No relief or repayment is available for National Insurance contributions so both the employee and employer would be left out of pocket in respect of those amounts. Employers should not amend or adjust their current or previous payroll records to reflect the repayment and should direct the employee to contact HMRC directly and read the guidance available on HMRC’s website. 
• Depending on the circumstances, the clawback provision could be seen as a loan for tax purposes and subject to a benefit in kind tax charge unless an exception applies (such as the exception for loans of less than £10,000). If the employer subsequently waives the ‘loan’, for example, on termination of the employee’s employment, this could give rise to further tax charges so clawback and repayment provisions need to be carefully drafted to ensure that the employer has adequate protection against such tax charges. 

Summary

Clawback provisions can be an effective tool for employers if drafted carefully. Employers need to be aware of the potential enforceability of their clawback provisions and also the tax considerations above. A key point for employers is to ensure the agreed clawback provisions with the employee are clearly documented and signed by the employee prior to starting the visa process. Employers also need to be mindful of the wider reputation issues and also, depending on the sector they operate, the potential financial trap some non-UK nationals may find themselves in. It is a balancing act between protecting the business but also wishing to be an attractive prospective employer for the overseas talent pool.