Bonus Clawback Provisions

Following the case of Steel v Spencer Road LLP (t/a The Omerta Group) [2023], there has been particular debate over the interpretation of certain bonus clawback provisions that are present within employment contracts.

Could a contractual bonus clawback provision be considered a restraint of trade?

A bonus clawback provision may state that an employee must repay their discretionary bonus if they were to leave or have provided notice within a certain period of time since receiving their bonus. 

The restraint of trade principle is formed from the idea that individuals should be free to work without any undue interference. 

Contractual terms that could infringe this freedom to work or carry out a trade or business will be deemed as void unless they go no further than is required to protect the company’s legitimate business interests. 

Therefore, when assessing whether a clause goes against the restraint of trade principle, a two-stage test must be applied:

• Whether the clause is in fact a restraint of trade; and
• If so, whether it is reasonable with reference to the interest of the specific parties and the public.

If this test is fulfilled, then the bonus clawback may be considered as a restraint of trade clause. 

Although, discretionary bonus schemes, which are provisional on the employee remaining in the employment for a specific period of time, functions as a disincentive to that particular employee resigning, this does not, in and of itself, amount to a restraint of trade. 

Consideration of the combined effect is not necessary when assessing whether the clawback provision amounts to a restraint of trade if no challenge has been brought regarding post-termination restrictive covenants and there is no suggestion that the post-termination restrictive covenants have a bearing on the interpretation. 

Bonus clawback provisions in employment contracts will not necessarily, without something obscure or supplementary within the contract itself, be in restraint of trade even if they require the employee to continue in employment to avoid their affect.

Advice to individuals:

• If an employee’s contract has a bonus clawback provision, particular thought should be spent regarding the timing of their resignation to try and avoid triggering repayment of the discretionary bonus.
• If this is not possible due to pressure of joining a new employer, it will be beneficial for the employee to consider negotiating a sign-on bonus to compensate for bonuses lost by resigning, at the new employer’s preferred time. 
• An employee should consider their position before litigating. This is due to the fact that litigation costs might be more than the bonus they are potentially losing.

Advice to employers:

• If employees leave without sufficient warning, clawback provisions are definitely worth considering. 
• Clawback provisions can serve as a powerful disincentive to leaving and are less likely to be subject to challenge via the courts than post termination restrictions (which are a lot easier to challenge, on an interim basis, even if they are ultimately found to be enforceable).