In a recent High Court case an employee argued that a clause inserted into his contract of employment by his employer requiring him to pay back his discretionary bonus in certain circumstances constituted an unlawful restraint of trade.

As you can probably tell from the image accompanying this post. The employee in this case probably wished that he’s placed closer attention to the terms of his contract of employment before deciding to hand in his notice in.

KEY ISSUES

Mr S worked for a global executive search firm. His contract of employment entitled him to a basic annual salary of £65,000. On top of that, Mr S’s employer also reserved a contractual right to pay an annual discretionary bonus to Mr S as well as to other employees. Mr S regularly received a sizeable discretionary bonus which dwarfed the size and amount of his annual salary.

In January 2022, Mr S’s employer paid him a discretionary bonus of £187,500. Mr S resigned from his employment a month later.

The problem for Mr S is that his contract of employment contained bonus clawback provisions. The provisions stated that if Mr S left his employment within 3 months of his receipt of the bonus payment or if he handed his notice in during that period then the bonus payment would immediately have to be repaid – in full.

WHAT HAPPENED NEXT?

Mr S’s employer demanded that he repay the discretionary bonus payment that he’d received in full. Mr S refused. Mr S argued that the employer’s bonus clawback provisions were unenforceable because the provisions were in 'restraint of trade' and/or that they were 'penalty clauses'.

WHAT DOES RESTRAINT OF TRADE MEAN?

Restraint of trade refers to the idea that a person should be free to follow their trade and use their knowledge and skills without undue or unreasonable interference. It follows that contractual terms designed to protect an employer’s legitimate business-related interests can be struck down where they are deemed to have been drafted too widely.

DID MR S WIN OR LOSE?

He lost! In relation to Mr S’s restraint of trade argument, the judge had little difficulty in finding that bonus or commission schemes which are conditional on employees remaining in employment for a specified period of time do operate as a disincentive to employees resigning; that does not mean that they operate in restraint of trade. The judge noted that disputed bonus clawback provisions did not impose any restrictions on where Mr S might work after his employment had ended, going on to state that:

"This is an incentivisation scheme with a very moderate requirement that the employee remains in post for three months after payment before giving notice and the practical effect of that is nugatory."

OUR VIEW

Perhaps the biggest takeaway from this case is that Mr S should have read the terms of his contract of employment before resigning. There can be little doubt that if he’d done so then a lengthy, stressful and no-doubt an expensive exercise could have been avoided.

In our experience its often the case that the Courts accept that employers are entitled (especially where significant payments are involved) to expect some benefit and protection in circumstances where bonus payments are intended to reward loyalty and disincentivise employees form jumping ship. The key as ever is to ensure that the right balance is struck between the employer taking reasonable steps to protect its own legitimate business interests and the ability of the employee to ultimately resign from their employment and go elsewhere.

Please contact Nathan Combes if you’d like more information about the issues raised in this update and/or or to find out more about employment law & HR related services.