Key considerations for employers with bonus clawback provisions

It is common to find clauses in employment contracts that govern the recovery of bonuses following the resignation of an employee shortly after payment, but to what extent are these provisions enforceable?

The High Court’s recent ruling in Steel v Spencer Road LLP clarified whether a bonus clawback provision which is conditional on the employee remaining in employment for a certain period of time is considered an unreasonable restraint of trade clause and therefore not enforceable.

Facts

Mr Steel was part of a discretionary bonus scheme where payment was conditional upon the employee staying in employment for three months from the date of payment, and that he had not given or received notice to terminate his contract during that period. Mr Steel resigned in February 2022 after receiving his substantial January 2022 bonus. His employer requested this bonus was repaid. Mr Steel refused on the basis that the clawback acted as an unreasonable restraint of trade.

Decision

Mr Steel’s claim failed, and it was decided that a bonus scheme that is conditional on an employee remaining in employment for a specified time will act as a disincentive to resign, but will not restrict an employee’s ability to work after he left his current employer. Simply losing the benefit will not impact an employee’s freedom to carry on their activities post-employment.

Comment

Although the case does provide some comfort, there are still some possible issues employers may run into when enforcing bonus clawbacks as each case will turn on its own facts. For example, if the recovery of a bonus is activated by an ex-employee breaching a restrictive covenant, such as working for a competitor, this may be considered an unlawful indirect restraint of trade clause.

Employers should therefore continue to act with caution in imposing clawback grounds which restrict where an employee goes to work post-termination and ensure that this restraint is protecting a legitimate interest in these cases. This can be done by:

• Ensuring clawback provisions are clearly drafted and not disproportionate
• Ensuring contractual terms are fully understood by all employees, this includes notice periods, post termination restrictions as well as clawback provisions.
• Avoiding provisions removing a benefit from employees if they compete post-termination as this could still be caught by the restraint of trade doctrine.

For assistance and support with bonus clawback provisions please speak to a member of the Employment Team who will be happy to advise and help implement the above steps for you.