In October 2023, the High Court upheld a decision of the Insolvency and Companies Court (“ICC”) that a bonus clawback provision was not a restraint of trade.

Mr Steel gave notice to terminate his employment after his discretionary bonus was paid, and then appealed to retain his bonus on the basis that he considered the bonus clawback provisions to be an unreasonable restraint of trade and/or a penalty clause.

Trainee solicitor Brogan Pennington reviews the decision in Steel v Spencer Road LLP.

Background to the case

The claimant, Mr Steel, had worked at global executive search firm Omerta since 2015. He was paid an annual salary of £65,000 but normally received a bonus larger than his basic salary – in January 2022, for example, he received a bonus of £187,500. Mr Steel’s contract stipulated that his bonus was dependent on his continued employment for three months from the date of the bonus payment, and him not having given or been given notice on the payment date.

Despite that condition of the bonus award, Mr Steel resigned in February 2022 and his employment ended in May 2022.

In response to Mr Steel’s resignation within three months of receiving his bonus, Omerta sought repayment of the full bonus relying on the clawback provisions in his contract. Mr Steel refused to repay the bonus and Omerta served a statutory demand for repayment of the full amount plus the legal fees they had incurred.

ICC findings

Mr Steel disputed the debt and applied to the ICC to set aside the statutory demand. He argued the clawback provision in his contract operated as a restraint of trade, and/or was a penalty clause and therefore unenforceable.

Relying on the decision in Tullet Prebon v BGC Brokers, the ICC decided that the clawback provision did not prevent Mr Steel finding new employment or working elsewhere and so it could not be a restraint of trade. The argument that the clawback provision was a penalty clause also failed.

Mr Steel repaid the bonus but appealed to the High Court against the ICC’s decision that the clawback clause was not a restraint of trade.

High Court appeal

The ICC’s was upheld by the High Court.

Although the bonus clawback clause in Mr Steel’s contract disincentivised him from leaving his employment for three months, it did not impose a duty on him not to compete with Omerta. The court ruled that it did not matter for the purposes of analysing the clawback clause that his employment contract contained post-termination covenants.

Why would a claimant go to these lengths? We can assume that Mr Steel’s new employer post-Omerta insisted he should leave his employment before his entitlement to the bonus award had crystallised – otherwise why take the risk of having to repay a substantial bonus award? Ultimately, Mr Steel’s decision to leave early and then litigate the issue proved costly.

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