The High Court has held in Steel v Spencer Road LLP that bonus "clawback" provisions in an employee's contract did not constitute a restraint of trade, even though the provisions operated as a disincentive to the employee resigning.
Mr Steel was employed under a contract that granted him a basic salary of £65,000 plus a yearly discretionary bonus that was conditional on him remaining in employment for three months from the date it was paid, and not having given, or been given, notice to terminate his employment during that period. In January 2022 he was paid a bonus of £187,500. He gave notice of termination in February 2022 and his employer (SR LLP) requested repayment of the bonus under the clawback provisions in his contract. SR LLP served a statutory demand for the full amount, plus legal fees, when he refused to pay it back. Mr Steel then applied to the Insolvency and Companies Court (ICC), which forms part of the chancery division of the High Court, to set aside the statutory demand, arguing that the bonus clawback provisions in the contract operated as an unreasonable restraint of trade or were penalty clauses and were therefore unenforceable.
Mr Steel's application was dismissed as the ICC judge found that the bonus clawback provisions did not fall within the restraint of trade doctrine as they did not restrict his ability to work elsewhere. Mr Steel repaid the bonus, but appealed to the High Court on the basis that the ICC judge's reliance on the decision in Tullett Prebon plc and ors v BGC Brokers LLP and ors was wrong as the case had been wrongly decided. The High Court in Tullett had concluded that clauses in financial brokers' contracts requiring the repayment of bonuses if the brokers resigned or were not actively performing their duties before the end of a specified minimum term were not a restraint of trade.
The High Court dismissed the appeal holding that Tullett Prebon was correctly decided. While there was no doubt that an employee bonus or commission scheme which is conditional on the employee remaining in employment for a specified period operates as a disincentive to that employee resigning, that does not, of itself, turn that provision into a restraint of trade. In this instance, Mr Steel's contract did not impose any restriction on where he might work after he left SR LLP.
Take note: The decision in Steel serves as a reminder that it is possible to have a bonus scheme in place where payment is conditional on the employee remaining in employment for a specified period of time. Although this will operate as a disincentive it will not necessarily make it in restraint of trade. As the Court pointed out in this case, Mr Steel was not restricted from working elsewhere by the bonus clawback provision.