International law firm Withers has acted for Spencer Road LLP t/a The Omerta Group in a case which finds that their bonus clawback provisions are neither a restraint of trade nor a penalty clause.
Spencer Road’s employment contracts included clawback provisions in respect of annual discretionary bonuses such that employees were required to repay any bonus paid within 3 months of the employee giving notice to terminate their employment. Mr Steel resigned within 3 months of being paid a discretionary bonus but refused to repay the bonus, despite the clawback provisions. Spencer Road took the step of issuing a statutory demand which Mr Steel unsuccessfully disputed. That decision was appealed by Mr Steel to the High Court on the basis that the bonus clawback was a restraint of trade and/or represented a penalty.
Mr Steel was unsuccessful on both counts.
Key lessons on clawback
This case has clarified the law in a particularly knotty but under-litigated area. However, it does not give employers carte blanche with regards to clawback provisions. It remains critical that such provisions are drafted clearly and reasonably by employers (as was the case here). If such provisions are ‘out of all proportion’ to the benefit received, then they are unlikely to be enforceable. Similarly, if they are drafted in such a way that a party is responsible for paying a large sum of money if they breach the contract (which was not the case here), such provisions could be deemed to be a penalty clause and therefore unenforceable.
The case clarifies for employees that they should not assume such clauses are unenforceable and/or will not be enforced. Employees should be aware that the timing of exit is critical. If a new employer is adamant that an employee should start as soon as possible such that they would engage a clawback provision, the employee should seek to negotiate a buy-out of any bonus to be clawed back from that new employer.
James Hockin, Lesley Timms and Giulia Trojano represented Spencer Road, instructing Andrew Shaw of South Square Chambers.
