Bonus clawback provision not a restraint of trade
In Steel v Spencer Road LLP the High Court has held that a clawback provision entitling the employer to seek repayment of a bonus if the employee resigns within 3 months of it being paid, was not a restraint of trade.
The individual was employed on a salary of £65,000 per annum but was also entitled to a sizeable bonus – he received a bonus of £187,500 in January of the relevant year. However, this bonus was conditional upon him remaining employed for 3 months after he was paid.
The employee resigned in February and, under the terms of the contract, the employer sought repayment of the bonus. When he resisted, the employer issued a statutory demand for the full amount plus legal costs. The employee applied to the Insolvency and Companies Courts for the statutory demand to be set aside, arguing that the bonus clawback clause in the contract was an unreasonable restraint of trade or otherwise operated as a penalty clause and so was unenforceable.
His claim was dismissed. The judge found that the clawback provision was not a restraint of trade because it did not affect his ability to work elsewhere. All it did was require him to remain in the same employment for a relatively short period of 3 months after payment. After examining the various authorities on the issue of clawbacks and loan repayment agreements, the judge concluded that there might be circumstances where the conditions imposed on retaining a bonus were out of proportion to the bonus being received, but his view on the situation was that the condition here was very moderate and a not unreasonable requirement compared to the size of the bonus. The judge also decreed that the argument of penalty clause had no real prospect of success.
The individual repaid the bonus but appealed to the High Court, arguing that one of the cases on which the judge relied had been wrongly decided; but the court disagreed. It acknowledged that the requirement to remain employed for 3 months was a disincentive to resigning, and the fact that he would have to give 3 months’ notice meant that effectively he had to remain employed for 6 months in total following the payment. However, the High Court concluded that this did not operate as a restraint of trade in that it did not prevent him from earning a living.