Bonus clawback provisions – are they a restraint of trade?

What is a Restraint of Trade?

The restraint of trade principle is based on the idea that an individual should be free to work without undue interference. Contractual terms seeking to restrict this freedom to work or carry out a trade or business will be void unless they are designed to protect a legitimate business interest and go no wider than reasonably necessary.

Facts of Case

Mr Steel (S) was employed by Spencer Road LLP (SR) under the terms of a contract that granted him a basic salary, plus an annual discretionary bonus. The bonus payment was conditional on him remaining in employment for three months after the date it was paid, and not having given/been given notice to terminate his employment.

In January 2022, S was paid a bonus of £187,500. S then resigned with notice in February 2022. As such and relying on the bonus clawback provisions within S’s contract, SR sought repayment of the bonus. This was refused by S which resulted in SR serving a statutory demand for the full amount. S applied to the Insolvency and Companies Court (ICC), which is a division of the High Court, to set aside the statutory demand, citing the clawback provisions relied upon operated as an unreasonable restraint of trade or were penalty clauses and were therefore unenforceable.

The ICC dismissed S’s application based on the decision made in the case of Tullett Prebon v BGC Brokers (Tullett). They held that the clawback provisions did not restrict S’s ability to work elsewhere and therefore they were not void for being a restraint of trade. The requirement to repay the bonus was not disproportionate, nor were the clawback provisions penalty clauses. S appealed to the High Court.

The Grounds of Appeal were:

• that the judgment in the case of Tullett was wrongly decided;
• that the ICC judge was wrong to conclude that the restraint of trade doctrine would only be engaged by bonus clawback provisions that went further than were reasonably necessary to protect a legitimate interest;
• that the ICC judge had failed to take into consideration other clauses in S’s contract of employment which operated as a significant disincentive to resign (3-month notice period and a 13-week post-termination restriction on working for a competitor); and
• that the ICC judge should not have refused the application to set aside a statutory demand in an area of law which is still emerging.

Why wasn’t this a Restraint of Trade?

The High Court considered that the ICC was right to follow the ruling in Tullett, which was that a contractual bonus clawback provision was not a restraint of trade. Although a bonus or commission scheme conditional on the employee remaining in employment for a specified period (after payment) would be a disincentive to that employee resigning, that does not automatically make it a restraint of trade.

Furthermore, although the 3-month notice clause meant that S would have had to remain employed for six months (including his notice period) after the payment of the bonus and he was also subject to post-termination restrictive covenants (for a period of 13 weeks), these other contractual provisions had no bearing on the interpretation of the bonus clawback.

What does this mean?

Although Courts have resisted attempts to provide an exhaustive definition of what does constitute a restraint of trade, they have made it clear that, when assessing whether or not the doctrine of restraint of trade is engaged, it is the effect of the provision in practice that will be determinative.

As such, employers cannot take this case as a definitive answer on whether bonus clawback provisions will never amount to a restraint on trade, but (if well drafted) they are potentially enforceable provided they are not disproportionate. The case has therefore provided greater clarity that while a clawback may disincentivise employees from terminating their employment, as long as it does not otherwise restrain where or how they go on to work, it is unlikely to be seen as a restraint of trade.

If you would like advice on your post termination restrictions, bonus clauses, or any clawback provisions of your employment contracts, please get in touch at [email protected].