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To resign or not to resign: Can bonus ‘clawback’ provisions constitute a restraint of trade?

Employee hands in resignation letter to boss

In the case of Steel v Spencer Road LLP, the High Court reinforced established precedent and held that a bonus clawback provision in an employment contract did not constitute an unlawful restraint of trade.

Background facts of the case

Mr Steel was employed by The Omerta Group, a global search executive firm. The terms of his contract included a basic annual salary of £65,000 and a yearly discretionary bonus.

The bonus was stated to be conditional on Mr Steel remaining in employment for three months from the date it was paid, and his not having given or been given notice to terminate his employment during that period. Otherwise, under the terms of his contract, Omerta could claw back the bonus.

In January 2022, Mr Steel received a bonus of £187,500. The following month, in February 2022, Mr Steel gave notice to terminate his employment. Omerta sought to claw back the bonus, but Mr Steel refused to pay it back. Consequently, Omerta served a statutory demand on Mr Steel seeking repayment of the bonus. Mr Steel applied for the statutory demand to be set aside in the Insolvency and Companies Court (ICC), arguing that the clause was unenforceable, as (amongst other things) it was an unreasonable restraint of trade.

Relying on the case of Tullett Prebon v BGC Brokers LP, which held, in that case, that clauses requiring the repayment of bonuses did not constitute a restraint of trade, the ICC dismissed Mr Steel’s case. The ICC distinguished the more recent decision in 20:20 London v Riley which concluded that there was no binding authority that a loan repayment provision could never amount to a restraint of trade and, on that basis, allowed the case to proceed to trial. Whilst acknowledging that there may be clawback provisions which were so disproportionate as to be unenforceable, the ICC held that Mr Steel’s clawback was not one of these types of clawback.

Mr Steel appealed this decision to the High Court arguing that (amongst other things);

  • The case of Tullet was wrongly decided and the ICC should have followed the approach of the decision in 20:20 London v Riley.
  • The judge should also have taken the other clauses in his contract, which acted as a further deterrent to resign, into consideration; and
  • The judge should allow his application to appeal as the area of law is still emerging.

The court’s decision

The High Court dismissed all grounds of his appeal. It held that:

  • The case of Tullett was decided correctly and it was the only cited authority on the point.
  • The clause did not, in fact, prevent Mr Steel from working elsewhere, it merely deterred him from leaving his employment. The disincentive was therefore not a restraint of trade. That analysis was not affected by whether there were other contractual provisions that imposed different restrictions (in respect of which, it noted, no challenge had been brought).
  • Finally, while the doctrine of restraint of trade continues to be applied and considered in different contexts, it held that the case was decided in line with established precedent.

What does this mean for employers?

This case highlights that it is important to ensure that in employment contracts bonus clawback provisions are expertly drafted as they can indeed be an enforceable and a proportionate way of protecting employers’ interests.

The courts have not held that bonus clawback provisions can never be a restraint of trade, but employers can take some comfort that clawback may disincentivise employees from terminating their employment, so long as it does not unlawfully or unreasonably restrain where they may then go on to work.

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