Employment contracts can incorporate a clawback clause whereby the employer could recover sums paid to an employee if conditions related to the payment are not satisfied. Such a clause needs to be reasonable, having regards to the legitimate interests of the parties.
When this type of clause is interpreted as an undue interference in preventing an employee earning a living elsewhere, the clause could be regarded as a restraint on trade – and thus be unenforceable.
If the clause is perceived by the court as a restraint on trade, the employee would be entitled to the sums the clause tried to prevent from paying. This would be awarded together with interest on the claim, court costs, and possibly the legal costs of the employee’s solicitor if the sum involved is over £10,000 (England and Wales).
The High Court’s decision in the case of Steel v Spencer Road LLP 2023 gives useful guidance on such matters.
What were the Facts of Steel v Spencer Road LLP 2023?
Mr Steel worked for a global executive search organisation, and participated in a discretionary bonus scheme where he received substantial bonuses for hitting targets. This was conditional on him being employed by the employer for 3 months from the date of the payment – with the bonus not given or received on notice of termination.
Mr Steel earned approximately £65,000 a year, and – in Jan 2022, he was paid a bonus of £187,500. Following this payment, Mr Steel resigned in Feb 2022 and refused to pay back the bonus. As such, the employer instigated a statutory demand process. Mr Steel applied to the court to set aside the statutory demand, arguing it was a penalty clause and/or an unreasonable restraint on trade – and therefore unenforceable.
The lower court decided the argument that the clawback clause was a penalty clause had no realistic prospect of success. As a result, Mr Steel took the matter on appeal to the High Court on the grounds of unreasonable restraint of trade only.
What did the High Court Decide?
The High Court decided that losing a benefit when an employee leaves their job is not an automatic restraint of trade – even when the clause is a disincentive to resigning. This applies unless the clause has a specific restriction on where the employee is allowed to work after leaving. To reach this, the court relied on the outcome of earlier decisions in the case of Tullett Prebon v BGC Brokers LP 2010. In this case, a loyalty bonus conditional on remaining in employment did not fall within the doctrine of restraint of trade.
Mr Steel had tried to argue that the Tullett case was wrongly decided, having tried to persuade the court that the decision in London Ltd v Riley 2012 should apply instead. In this case, the High Court had found that the disincentive effect of repayment provision was capable of engaging the doctrine of restraint of trade. As such, it needed to satisfy the test of reasonableness on the facts. However, this case was not about bonus or commission clawbacks – whereas the Tullett case was.
The High Court also decided that the requirement to remain in employment for a period of time after the bonus was paid – 3 months contractual notice and 3 months clawback provision for a total of 6 months, had no impact on enforcing the clawback terms.
What can Employers Learn from this?
A well-drafted bonus/commission clawback clause is likely to be enforceable by the courts. As such, it should not be perceived as a restraint of trade provided the severity of the clawbacks' consequences are in proportion to the benefits received.
This article is for informational and educational purposes only and should not be relied upon as legal advice. If you require further assistance, please do not hesitate to contact our Free Advice Line on 0116 274 9193.
