Bonus ‘clawback’ provisions did not constitute restraint of trade

The High Court has held that bonus clawback clauses in an employment contract were not a restraint of trade.

Steel v Spencer Road LLP (t/a The Omerta Group) [2023] EWHC 2492 (Ch)

Facts of the case

The appellant, Mr Steel, was employed on a basic salary of £65,000. His employment contract provided for a discretionary bonus scheme, subject to the condition that the bonus could be recovered by the employer as a debt if he gave or received notice to terminate his employment within three months following the payment.

In January 2022, Mr Steel was paid a bonus of £187,500, and in February 2022 he gave his employer a notice of resignation. The employer asked Mr Steel to repay the bonus, and he refused.

Original decision at the Insolvency and Companies Court (ICC) and appeal to the High Court

In response to a statutory demand from his employer for repayment of the £187,500 bonus (plus £12,623 legal fees), Mr Steel applied to the ICC to set this aside, arguing that the bonus clawback provisions were an unreasonable restraint of trade. The ICC found against him, and Mr Steel appealed to the High Court.

The High Court agreed with the ICC judge’s finding that the bonus clawback provisions did not count as a restraint on trade. Although the clause indisputably served as a disincentive on the employee to resign, it did not restrict his ability to work elsewhere.

The Birketts view

This case is a useful restatement of earlier precedents, agreeing that the payment of contractual commission being subject to continuing employment, but not otherwise restricting an employee’s freedom to take up other employment, is not a restraint of trade. However, as the High Court acknowledged, each case is fact sensitive.

Mr Steel’s contract provided:

‘As the Discretionary Bonus Scheme is intended to incentivise employees to remain in the employment of the Company, payment of any Discretionary Bonus is conditional on… the Employee not having given or been given notice to terminate the

Appointment… during the three-month period following the Payment Date [of the bonus].’

The ICC judge, while finding that this did not constitute a restraint on trade, commented that there could be circumstances in which the consequences were disproportionate to the benefit received and suggested that his view might have been different if the ‘incentive scheme was in any way elusory or intended to be Mr Steel’s actual remuneration dressed up as a discretionary scheme’, or if there had been a disparity of bargaining power. On the facts, he concluded, ‘this is an incentivisation scheme with a very moderate requirement that the employee remains in post for three months after payment before giving notice’.

At the High Court, the judge was asked to consider the effect of the clawback provision in combination with Mr Steel’s three-month notice period (meaning he would have to remain working for at least six months after payment to retain the bonus), but labelled this submission misconceived – repeating that a disincentive to resign was not a restraint on trade. She also rejected the suggestion that a separate 13-week post-termination restrictive covenant in the employment contract had any bearing on the interpretation of the bonus clawback provisions.

Nonetheless, the High Court judge noted that the law recognises that restraints on trade can be indirect and that a contract by a person not to carry on a particular trade can be equivalent to a contract offering a benefit if they do not do so. The principle was restated that whether trade is restrained is a question of substance, not form.