The High Court has recently ruled in favour of employers in cases involving bonus ‘clawback’ provisions. The case of Steel v Spencer Road LLP saw the court affirming the legality of contractual clauses that require employees to repay bonuses if they resign within a specific time-frame after the bonus payment.
The Case: Steel v Spencer Road LLP
The High Court considered the situation of an employee, who received a substantial bonus of £187,500 in January 2022. The employment contract stipulated that the bonus was discretional and conditional upon the employee remaining employed for three months from the date of payment. If the employee resigned within this period, the bonus had to be repaid.
Despite receiving the bonus, the employee resigned in February 2022. The employer invoked the ‘clawback’ provision and demanded the repayment of the bonus. The employee refused. The employer subsequently served a statutory demand upon the employee for the repayment of the bonus in full plus legal fees. The employee applied to the court for the statutory demand to be set aside.
The Court’s Verdict
The employee argued that the clawback provisions contained in his contract acted as an unreasonable restraint of trade or were penalty clauses and were therefore unenforceable.
The High Court emphatically ruled in favour of the employer. The judge maintained that the bonus ‘clawback’ provisions, though serving as a disincentive for employees to resign, did not constitute a restraint of trade as it did not prevent the employee from working elsewhere. The Judge also determined that the ‘clawback’ provisions were not in the nature of penalty clauses.
Additionally, the judge dismissed the employee’s argument that the ‘clawback’ provision, when combined with other clauses in the contract (such as the notice period and post-termination restrictive covenants) was an undue restriction on his employment rights. The court emphasised that no challenge had been brought against the other provisions of the employee’s contract, and as such, they did not impact the interpretation of the bonus ‘clawback’ clause.
Implications for Employers and Employees
This significant ruling provides much needed clarity on the enforceability of bonus ‘clawback’ provisions within employment contracts. Employers can now have confidence in the legality of such clauses, which serve to protect their investments in employee bonuses and maintain a stable workforce.
For employees, understanding the terms of their employment contracts, including bonus provisions, becomes paramount. While bonus ‘clawback’ provisions might act as a disincentive to resign, they do not infringe upon an employee’s ability to seek employment elsewhere.
This article has been prepared for information purposes only. For specific queries, legal advice, or any further information, please contact us on LinkedIn or via firstname.lastname@example.org.