Bonuses: Bonus 'claw back' provisions were not a restraint of trade

Bonuses: Bonus 'claw back' provisions were not a restraint of trade

Published 10 November 2023

Contractual provisions requiring an employee to repay his bonus if his employment terminated within three months of the bonus payment were not a restraint of trade.

The facts

Mr Steel was employed by Spencer Road LLP, an executive search firm. His basic salary was £65,000 a year and he was also eligible for a discretionary bonus. The discretionary bonus was conditional on his remaining in employment and not being under notice for three months after a bonus payment was made. If he did not meet these conditions, Spencer Road was entitled under his contract to recover (or 'claw back') any bonus payments which had been made in that three month period.

In January 2022, Mr Steel was paid a bonus of £187,500. When he handed in his notice the next month, Spencer Road asked him to repay the bonus. When he refused to do so, Spencer Road served him with a statutory demand for the full amount of the bonus, plus legal fees. Mr Steel applied to the Insolvency and Company Court (the "ICC") to have the statutory demand set aside. He made this application on the basis that the claw back provisions were an unreasonable restraint of trade and a penalty clause.

The ICC dismissed his application. He raised an appeal in the High Court against the ICC's decision that the claw back provisions were not in restraint of trade. The High Court dismissed his appeal.

Key points in the courts' decisions were that:

• A bonus claw back decision is certainly a disincentive to resignation.
• However, the bonus claw back provision did not restrict Mr Steel after he left Spencer Road.
• Following existing case law, the claw back provisions were not therefore in restraint of trade.
• There was no need for the court to consider the effect of the bonus clawback provisions when combined with any other provisions in his contract (his notice period and post termination restrictive covenants).

What does this mean for employers?

Contractual provisions requiring repayment of bonus or commission if the employee is under notice or leaves within a stated period will usually be enforceable. This is not new law, but this case provides reassuring confirmation for employers who use claw back provisions. There is one small note of caution however: the ICC judge commented that there may be circumstances where the severity of the consequence of the claw back is clearly out of all proportion to the benefit received. No examples were given of this.

Charles Anthony Joseph Steel -v- Spencer Road LLP (trading as The Omerta Group)