In the recent case of Steel v Spencer Road LLP, the High Court has held that a bonus clawback provision was enforceable as it was not a restraint of trade, given that it did not impose any restriction on where the employee might work after he left.
Facts
Mr Steel was employed in an executive search firm, and his contract included a provision for a discretionary bonus scheme. The contract stated that if Mr Steel left within three months of the bonus being paid, or gave notice within three months of the bonus being paid, the company would be able to recover the amount of any discretionary bonus from him. It also provided that Mr Steel would indemnify the company against any costs etc. it incurred in enforcing payment.
Mr Steel received an unusually high discretionary bonus in January 2022 of £187,500, which dwarfed his basic annual salary of £65,000. He then submitted his resignation in late February 2022. The company sought to enforce the clawback provision in Mr Steel’s contract of employment.
The company served Mr Steel with a statutory demand when he refused to make payment. Mr Steel applied for the statutory demand to be set aside, but his application was dismissed. Mr Steel appealed on the basis that the clawback provisions were unenforceable as a restraint of trade.
Decision
The High Court dismissed each of Mr Steel’s grounds of appeal.
In particular, the High Court held that the only previous case which had dealt with whether clawback provisions of loyalty bonuses were a restraint of trade (Tullett Prebon v BGC Brokers) had been rightly decided. The High Court in Tullett Prebon held that the clawback of a loyalty bonus was enforceable and was not a restraint of trade, as “they do not affect the employees’ ability to work after leaving. They are substantial sums paid to highly paid employees as a reward for loyalty”. In Mr Steel’s case, the High Court held that whilst clawback provisions linked to a bonus were clearly a disincentive to resigning, it didn’t follow that the provision was a restraint in trade as it didn’t impose any restrictions on where the employee might work after he left employment.
When considering the enforceability of the clawback provisions, Mr Steel also attempted to argue that the court should have considered other provisions of his contract (such as post-termination restrictions). In particular, Mr Steel argued that the clawback provision meant he would be disincentivised from resigning for three months after the bonus payment. As Mr Steel was subject to a three month notice period, he argued that the this meant he would have to remain an employee for approximately six months after payment to retain the bonus. Mr Steel was then subject to post-termination restrictions, including a restriction for a period of 13 weeks which prevented him from working for a competitor.
The High Court also dismissed this argument on the basis that, whilst the clawback provisions were a disincentive for Mr Steel to resign, it was not a restraint of trade. The court held that analysis wasn’t impacted by other contractual provisions which imposed different restrictions, such as post-termination restrictions.
Comment
This case provides useful authority for employers wanting to pay bonus payments, but who wish to include clawback provisions to promote loyalty. It reinforces the previous authority that bonus clawback provisions are not restraints of trade. However, care should be taken nevertheless to ensure that provisions are reasonable, clear and proportionate, to maximise the chances of enforceability.
Rebecca Berry