Employment Law Cases
Bonus clawback and restraint of trade
A contractual clause requiring an employee who had given notice to repay a discretionary bonus was not a restraint of trade, and the employer was entitled to rely on it and receive the repayment.
A clause in Mr Steel’s contract with Omerta provided that payment of any discretionary bonus was conditional upon Mr Steel both remaining employed and not giving, or being given notice, for a period of three months from the date the discretionary bonus was paid. A further clause provided that Omerta had the right to recover any discretionary bonus payments made to Mr Steel in the three-month period prior to Mr Steel serving or receiving notice. Another clause entitled Omerta to repayment of the bonus and any costs incurred in enforcing the repayment.
Mr Steel received a bonus of £187,500 in January 2022 under the discretionary scheme. He then gave notice to terminate his employment the following month, leading Omerta to request repayment of this bonus under the clawback provision. Mr Steel refused to do so and the employer subsequently served a statutory demand for the full amount of the bonus plus legal fees. In seeking to set this statutory demand aside, Mr Steel argued that the bonus clawback provisions in his contract were unenforceable as they operated as either an unreasonable restraint of trade (a provision which prevents or impedes a person from carrying out trade or using their experience or skills), or as a penalty clause. His initial attempt failed.
The judge (in the Insolvency and Companies Court) found that the bonus clawback provisions did not fall within the restraint of trade doctrine. In reaching this decision, the judge relied on a previous decision where it was held that that clauses which required the repayment of retention bonuses if the employee resigned before the end of specified term were not provisions in restraint of trade - because they did not affect an employee’s freedom to take up other employment after leaving. While there might be circumstances where the severity of the consequences were clearly out of all proportion to the benefit received, this was not arguable in Mr Steel’s case, where the conditions attached to the bonus payment were said to be ‘very moderate’. The judge also held that the argument that the bonus clawback provisions operated as a penalty clause had no real prospect of success. Mr Steel, after repaying the bonus, nonetheless appealed to the High Court.
High Court decision
His appeal was dismissed.
While the existence of a clawback (such as that applicable to Mr Steel) is a disincentive to resigning, that does not turn it into a restraint on trade. An employee in this situation is still free to go and work elsewhere without restriction.
Mr Steel also argued that the impact of other clauses in the contract which operated as a significant disincentive to resign should have been considered. In particular, while the bonus clawback disincentivised him from resigning within three months of the bonus payment date, he was also subject to a three-month notice period, which meant that he would have to stay in employment for a minimum of six months after the bonus payment date to retain the bonus. Further, he was subject to post-termination covenants, including a three-month non-compete restriction. The High Court was not persuaded by these arguments. The validity of the clawback provisions was not affected by the presence of these other clauses, which were not in issue.
This is a decision which will be of great interest to employers who may want to rewrite their contracts to include similar clauses. In practice of course employees may go off sick or do little work in the three-month period after receipt of bonus and then hand in their notice, but nevertheless such a clause will, for many, discourage employees from holding on for a bonus and instead use it as a negotiating point with their new employer.