Are Bonus Clawback Provisions an Unreasonable Restraint of Trade?

Employment bonuses are commonly awarded on the basis that they must be repaid if recipients leave their jobs within a given period of time. In an important ruling, the High Court considered whether such clawback arrangements are capable of amounting to an unreasonable restraint of trade (Steel v Spencer Road LLP).

A global executive search firm operated a discretionary annual bonus scheme whereby awards were conditional on recipients remaining in the firm's employ, and not having given, or been given, notice of termination of their appointments, during the three months following the date of payment.

A dispute arose when an employee resigned during the month following his receipt of a £187,500 bonus, a sum that was almost three times his basic salary. After he declined to reimburse that sum, the firm issued a statutory demand requiring him to repay the full amount of the bonus plus legal costs.

In applying to have the demand set aside, the employee contended that the clawback provisions operated as an unreasonable restraint of trade and were thus unenforceable. Given that he was required to give three months' notice before leaving his job, the provisions meant that he could secure his bonus only if he worked for the firm for an additional six months.

Rejecting his application, a judge found that the weight of legal authority was that the clawback provisions did not fall within the restraint of trade doctrine since they did not restrict his ability to work elsewhere. The conditions attached to his bonus payments were, the judge ruled, very moderate and it was not arguable that they gave rise to adverse consequences for him that were clearly out of all proportion to the benefit he received.

In dismissing his appeal against that outcome, the Court acknowledged that there may be circumstances in which bonus clawback provisions are so punitive as to amount to an unreasonable restraint of trade. It was agreed that the provisions in question disincentivised the employee from resigning within three months of receiving his annual bonus. However, the judge's analysis of the law and his conclusion that the effect of the provisions was not unreasonable were unimpeachable.