Clawback provisions are not the same as a restraint of trade

  • Employment Contract
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Peninsula Team, Peninsula Team

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The High Court, in the case of Steel v Spencer Road LLP (t/a The Omerta Group), had to consider whether or not a clawback clause was a restraint of trade

This case involved a contractual dispute which was dealt with by the civil courts, rather than through the employment tribunal system. The restraint of trade principle, which comes from contract law, is based on the idea that an individual should be free to work without undue interference from another party. Contractual terms that appear to restrict this freedom to work or carry out a trade or business must go no further than is necessary to protect an organisation’s legitimate business interests. Where they do, they could be deemed void.

A two-stage test is applied in deciding whether a clause breaches the restraint of trade doctrine.

  • Is the clause in fact a restraint of trade?
  • If it is, is it reasonable with regard to the parties and the public interest?

The Facts

The claimant worked for the defendant for almost seven years prior to his resignation. Over that time, he received a substantial amount in discretionary annual bonuses. In the last year of his employment, this bonus was to the value of £187,500. Shortly after receiving the bonus, the claimant resigned his position to go and work for a competitor of the respondent.

Under his contract of employment, the discretionary bonus was conditional on (1) the employee staying in employment for three months following the payment of the bonus and (2) notice to terminate the contract not being served or given during that three-month period.

In accordance with the above terms, or “clawback provisions”, the respondent requested repayment of the bonus. The claimant refused to do this, and so the respondent served a statutory demand for the full amount of the bonus plus over £12,000 in legal fees.

Insolvency and Companies Court (ICC)

In response to the statutory demand, the claimant applied to the ICC, which has the power to set aside a statutory demand if the debt is disputed “on grounds which appear to the court to be substantial”. Central to his argument for why this should happen was that the clawback provisions were an unreasonable restraint of trade, and/or alternatively they were penalty clauses which are unenforceable.

The ICC dismissed the application, holding that the clawback provisions could not be a restraint of trade as defined in law as they didn’t stop the claimant from working elsewhere. Whilst there might be circumstances, the judge went on, where the consequences of a clawback clause are so severe that they would be out of proportion to the benefit received by the respondent, this was not the case here.

The argument that the clawback provisions were penalty clauses was also rejected. This was appealed by the claimant and the case went before the High Court.

High Court

Looking at the facts of the case, the High Court drew a distinction between a disincentive to resign and a restraint of trade and held that a clause that disincentivises an employee from leaving employment does not in itself make that clause a restraint of trade. In this case, the bonus scheme could cause an employee to remain in employment longer than they would have liked to avoid the clawback, but it did not actually stop them leaving or working elsewhere. It just made that option less palatable.

Looking at the clawback provisions alongside other clauses within the contract, including a three-month notice period and a 13-week post-termination restriction on working for a competitor, the court rejected the argument that all together these acted as a sufficiently strong disincentive to resign that the effect was to act as a restraint of trade. In any event, the claimant had not challenged these provisions.

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