In a welcome decision for employers, in Steel v Spencer Road LLP the High Court has upheld as enforceable a clause requiring an employee to repay a significant bonus following his resignation.
A clause in Mr Steel’s contract with Spencer Road LLP, an LLP trading as Omerta, provided that payment of a discretionary bonus was conditional upon Mr Steel both remaining employed and not giving or being given notice for a period of three months from the date the discretionary bonus was paid. A further clause provided that Omerta had the right to recover any discretionary bonus payments made to Mr Steel in the three month period prior to Mr Steel serving or receiving notice. A yet further clause entitled Omerta to repayment of the bonus and any costs incurred in enforcing the repayment.
In January 2022, Mr Steel received a bonus of £187,500. In the following month, February 2022, he gave notice of his resignation and his employment with Omerta ended in May 2022. Omerta sought repayment of the discretionary bonus. Mr Steel refused and Omerta served a statutory demand. Mr Steel applied to the Insolvency and Companies Court (“ICC”) to have the demand set aside, arguing that the clawback provisions in his contract were unenforceable because they were an unreasonable restraint of trade and operated as a penalty clause.
The ICC dismissed the application, relying on the finding in Tullet Prebon plc and ors v BGC Brokers LP and ors and anor that clawback provisions do not actively restrict trade or prevent employees from taking another job before the end of the specified time period. While acknowledging that there may be clawback provisions which were so disproportionate as to be unenforceable, the ICC held that Mr Steel’s clawback was not one of these. The argument that the clawback provisions acted as a penalty clause was struck out as having no real prospect of success.
Mr Steel appealed to the High Court on the grounds that Tullet was wrongly decided in the light of earlier authorities. The High Court distinguished those earlier authorities, finding that Tullet was directly in point in Mr Steel’s case and was not wrongly decided. It held that, while the existence of a clawback (such as that applicable to Mr Steel) is a disincentive to resigning, that does not turn it into a restraint on trade. Mr Steel sought to argue that the bonus clawback had to be read with the other provisions of the contract, including his notice provision and post termination restrictions, and that the cumulative effect meant that Mr Steel had to remain an employee for approximately six months after being paid his bonus in order to retain it and would then be subject to restrictions. The High Court also rejected this ground of appeal, saying that the fact that other contractual provisions (such as restrictive covenants) imposed other restrictions had no bearing on the interpretation of the clawback provision which was not a restraint of trade.
Takeaway: Clawback provisions in employment contracts (entitling an employer to recover a bonus if the employee leaves within a specified period) are likely to be enforceable if well drafted. Provided that such provisions are not disproportionate, they will not be treated as a restraint of trade, and employers are free to include them in their employment contracts.
