Bonus repayment clause did not constitute a restraint of trade
The High Court has refused to set aside a statutory demand seeking repayment of an employee's bonus following his resignation. The clause did not constitute a restraint of trade, even though it could have dissuaded the employee from resigning.
Background
In the case of Steel v Spencer Road LLP, Mr Steel was entitled to an annual discretionary bonus. The bonus was conditional on Mr Steel remaining in employment for three months from the date it was paid, without having given or received notice of termination of employment.
In January 2022, Mr Steel's bonus was £187,500. Mr Steel gave notice of resignation in February 2022, and his employer asked for the bonus to be repaid under the clawback provisions of Mr Steel's contract. Mr Steel refused to repay the bonus and his employer served a statutory demand for payment of the full amount plus legal fees.
Application
Mr Steel applied to set aside the statutory demand. He argued that the clawback provisions in his contract were an unreasonable 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 purporting to restrict this freedom to work or carry out a trade or business will be void unless they are designed to protect legitimate business interests and are no wider than reasonably necessary.
The Insolvency and Companies Court (ICC) dismissed Mr Steel's application. The clawback provisions did not restrict Mr Steel's ability to work elsewhere. They were therefore not void for being a restraint of trade. The requirement to repay the bonus was not disproportionate, and the judge in fact described the clawback conditions as 'very moderate'. In addition, the ICC found that the clawback provisions were not penalty clauses.
In response, Mr Steel repaid the bonus but appealed to the High Court against the ICC's decision.
High Court decision
The High Court dismissed Mr Steel's appeal. It acknowledged that the clawback provisions would have acted as a disincentive against resignation. However, this does not automatically turn the provisions into an unlawful restraint of trade. It was true that Mr Steel was subject to a three month notice period and a 13 week restriction on working for competitors following termination. However, the validity of the clawback provisions was not affected by the presence of these other contractual clauses, which were not in issue. The ICC judge had referred to binding case law authority in determining Mr Steel's application. Taking all this into account, the High Court upheld the ICC's decision.
Learning points
Restraint of trade issues can be complicated and costly to litigate. This decision highlights the difference between an unenforceable restraint of trade, and protective provisions within a contractual remuneration package that may reasonably disincentivise certain behaviour.