Bonus clawback provision was not an unlawful restraint of trade

Employers will likely be familiar with the concept that unreasonable post-termination restrictions are unlawful as they operate in restraint of trade (i.e. they unreasonably prevent an individual from earning a living).

We have seen on a few occasions, the same restraint of trade principle argued in relation to clawback provisions, the argument being that a clawback provision requiring an employee to remain employed for a particular period effectively prevents that employee from finding another job and is therefore an unlawful restraint of trade. This issue was looked at again by the High Court in Steel v Spencer Road LLP.

Mr Steel’s remuneration package comprised salary and a discretionary annual bonus. For 2021, his salary was £65,000 and in January 2022, he received a bonus of £187,500. He resigned in February 2022 and his employer sought to recover the bonus because the terms of the bonus scheme were that the bonus was repayable if the employee left or gave notice within three months of it being paid.

Mr Steel argued that he should not have to repay the bonus as the clawback provisions were an unreasonable restraint of trade. It meant that in practice, unless he wanted to sacrifice his bonus payment, he could not start working for another employer until July (as he could not serve notice within three months and then had a  twelve week notice period to serve).

The High Court dismissed Mr Steel’s argument.

Whilst it is possible that a particularly restrictive clawback provision might be an unlawful restraint of trade (for example, one that required the individual to remain employed for years or where the penalty for leaving was disproportionate to the benefit received), in this case, the clawback provision was seen as not exceptional. Mr Steel was not prevented from working elsewhere, but there were just financial consequences for him if he served notice within three months of receiving the bonus payment.

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If you have any queries you would like to discuss regarding bonus clawback provisions or the restraint of trade, please contact Rena Magdanior Matt McBride.