The High Court recently considered whether a bonus clawback provision in an employment contract amounted to an unreasonable restraint of trade, so making it unenforceable. In this instance, the employer could require repayment if the employee gave or received notice to terminate his employment within three months of the payment of a bonus.

In Steel v. Spencer Road LLP (t/a The Omerta Group) [2023], Mr Steel received a bonus in January 2022 under a discretionary scheme. He then gave notice to terminate his employment the following month, leading his employer to request repayment of this bonus under the clawback provision. Mr Steel refused to do so and the employer subsequently served a statutory demand for the full amount of the bonus.

In seeking to set this statutory demand aside, Mr Steel argued that the bonus clawback provisions in his employment contract were unenforceable as they operated as either an unreasonable restraint of trade (a provision which prevents or impedes a person from carrying out trade or using their experience or skills), or as a penalty clause. The Insolvency and Company Courts (ICC) found against him. His subsequent appeal against the ICC's decision has brought the "restraint of trade" doctrine back into the spotlight.

The grounds of appeal were:

• that the judgment in the case of Tullett Prebon v. BGC Brokers LP [2010] (which considered whether a loyalty bonus, conditional on remaining in employment, engaged the doctrine of restraint of trade) was wrongly decided;
• that the ICC judge was wrong to conclude that the restraint of trade doctrine would only be engaged by bonus clawback provisions that were out of all proportion to the benefit conferred;
• that the ICC judge had failed to take into consideration other clauses in the contract which operated as a significant disincentive to resign; and
• that the ICC judge should not have refused the application to set aside a statutory demand in an area of law which is still emerging.

In dismissing all four grounds of his appeal, the High Court found that the clawback provisions did not restrict Mr Steel's ability to work elsewhere and therefore upheld the decision of the ICC.

We consider each ground of appeal in turn below.

The argument that Tullett Prebon was wrongly decided

Mr Steel argued that, rather than relying on Tullett Prebon, the ICC should have instead followed the approach in the case of 20:20 London Ltd v. Riley [2012]. In this earlier case, the High Court had found that the disincentive effect of a repayment provision was capable of engaging the doctrine of restraint of trade and so would need to satisfy the test of reasonableness on the facts.

However, while other cases did concern restraint of trade, Tullett Prebon was the only one which specifically addressed the question of whether a bonus clawback operating as a disincentive to resign is a restraint of trade. As such, the High Court approved the reasoning in Tullett Prebon i.e. that while a bonus/commission scheme, which is conditional on the employee remaining in employment for a specified period of time, does act as a disincentive to them resigning, it does not turn such a provision into a restraint of trade.

Restraint of trade should only be engaged where bonus clawback provisions are out of all proportion to the benefit conferred

The High Court found that this argument essentially accused the judge of wrongly conflating the two stages of the restraint of trade test. Under this test, it must be asked: (i) whether a particular contract is a restraint of trade; and (ii) if it is, whether it is reasonable taking account of the interests of the public and the parties.

This ICC decision concerned only the first of these questions and the High Court held that the ICC judge had clearly addressed this first stage of the test when determining whether the provisions needed to be subjected to the requirement of reasonableness.

The High Court stated that while these two stages may overlap in some cases, as some facts may be relevant to both, the judge had correctly considered the stages in this instance, and had only taken into account overlapping facts to acknowledge the fact-sensitive nature of the test.

As such, this second ground of appeal was also dismissed.

Other clauses operating as a significant disincentive to resign should have also been considered

In addition to the bonus clawback provisions, Mr Steel was also subject to a three-month notice period, meaning he would realistically have to remain an employee for approximately six months after the bonus payment to retain it.

Mr Steel argued that the ICC judge should have considered the effect of the bonus clawback in combination with both this three-month notice period and the fact that he was subject to a 13-week post-termination restriction on working for a competitor.

The High Court disagreed, holding that this ground was misconceived. It accepted that the bonus clawback operated as a disincentive to resigning but had already concluded, when considering the first ground of appeal, that that disincentive was not a restraint of trade. As such, this third ground was similarly dismissed.

Emerging area of law

Finally, Mr Steel argued that the ICC's judgment should be set aside on the basis that the application of restraint of trade principles to provisions such as bonus clawbacks is not settled and continues to be subject to conflicting judgments from various cases.

This argument was also dismissed. While the doctrine of restraint of trade does continue to be applied and considered in new contexts, that was not the case here. In this instance, the decision of the ICC judge was based on a line of authority which correctly stated the principle to be applied to bonus clawback and commission payment provisions which are conditional on the employee remaining in employment for a specified period of time.

This case was therefore not novel but rather one where established precedent could be applied and the appeal was dismissed in its entirety.

Key takeaways

While no new principles were developed in this case, the court agreed with the decision in Tullett Prebon that bonus/commission schemes conditional on employees remaining in employment for a specific period are a disincentive to resigning. However, this does not automatically turn them into a restraint on trade.

Courts have resisted attempts to provide an exhaustive definition of what does constitute a restraint of trade, but have made it clear that, when assessing whether or not the doctrine of restraint of trade is engaged, it is the effect of the provision in practice that will be important.

As such, employers cannot take this case as a definitive determination that bonus clawback provisions will never amount to a restraint on trade. It has, however, provided greater clarity that while a clawback may disincentivise employees from terminating their employment, as long as it does not otherwise restrain where or how they then go on to work, it is unlikely to fall foul of the doctrine of restraint of trade.