Thu 09 Nov 2023

Can bonus clawback provisions restrict an employee's ability to work elsewhere?

The High Court recently had to consider whether a bonus clawback provision was an unreasonable restraint of trade.   

It is common to find clauses in employment contracts governing what will happen to bonuses if an employee resigns before or within a short period after a bonus has been paid.  In Steel v Spencer Road LLP trading as The Omerta Group ("Omerta"), the employee was remunerated via a basic annual salary plus a discretionary bonus.  The bonus was conditional on (1) the employee staying in employment for 3 months from the date of payment of any bonus and (2) not having given or been given notice to terminate his contract prior to the end of the 3 month period.

The employee received substantial bonuses during his, almost, 7 years working for Omerta.  In January 2022, this amounted to £187,500, which was nearly 3 times his basic salary.  The employee then resigned in February 2022.  In accordance with the terms of his employment contract, Omerta requested repayment of the bonus.  When the employee refused Omerta served a statutory demand for the full amount of the bonus plus over £12,000 in legal fees.  The employee applied to the Insolvency and Company Courts ("ICC") to have the statutory demand set aside, contending that the clawback provisions operated as an unreasonable restraint of trade, or were penalty clauses and therefore unenforceable.  The ICC dismissed the application.  Although the employee repaid the bonus, he appealed the ICC judgment as regards the restraint of trade issue to the High Court.

When considering the arguments presented by the employee, the High Court found, approving an earlier case with similar facts, that while a bonus scheme conditional on an employee remaining in employment for a specified time does act as a disincentive to resign, it does not amount to a restraint of trade.  The High Court was also not persuaded that the ICC judge had wrongly applied the two stages of the "restraint of trade test", nor that other clauses in the employment contract - specifically a 3 month notice period and a thirteen week post-termination restriction on working for a competitor - operated as a significant disincentive to resign and should have been considered.  Finally, the High Court held that the application to have the statutory demand set aside was not a novel case, but rather one that had been decided on the basis of established legal precedent that the ICC judge had correctly applied.

Although this case does provide some comfort for employers that a bonus clawback will not amount to an unreasonable restraint of trade (even if it does act as a disincentive from resigning), each case will turn on its own facts.  In order to reduce the likelihood of issues arising employers should ensure that contractual terms (including notice periods and post termination restrictions as well as clawback provisions) can be easily and fully understood by employees.  The clawback provisions themselves should be clearly drafted and not disproportionate, acting as a disincentive to resignation rather than a restraint of trade.


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