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Clawing back discretionary bonuses

Can you ever ‘clawback’ a discretionary bonus paid to an employee?

The High Court in London recently considered a case where an employer sought the repayment of the bonus paid to an employee who then quit. 

Background

The Appellant was employed by the Respondent under a contract of employment, which provided him with a basic salary plus a yearly discretionary bonus. 

He was paid a bonus of £187,500 in January 2022. In February 2022, the Appellant resigned, giving the required notice.

The Respondent requested repayment of the bonus under the clawback provision in his contract. The Appellant refused to repay the bonus. The Respondent served the Appellant with a statutory demand for the full bonus plus legal fees. 

The Insolvency and Companies Court (ICC)

He applied to the ICC to set aside the statutory demand because he believed the clawback provision operated as an unreasonable restraint of trade or a penalty clause and was, therefore, not enforceable.

The ICC found that the clawback provision did not restrict his ability to work elsewhere and, therefore, did not fall within the restraint of trade doctrine. Further, it held that the argument that the provision operated as a penalty clause had no real prospects of success. 

The Appellant appealed to the High Court. 

The High Court

The High Court dismissed the appeal, agreeing with the ICC that the clawback provision did not amount to a restraint of trade despite acting as a disincentive to his resigning.

What is a penalty clause?

A penalty clause may exist where there is a provision in a contract of employment requiring repayment from an employee. The payment sum stipulated imposes a detriment on the employee, which is out of proportion to the employer’s legitimate interest.

What is restraint of trade?

Under the doctrine of restraint of trade, any contractual term intended to restrict an individual’s freedom to work for others or carry out their trade or business is unenforceable unless the employer can show that it has a legitimate interest that requires protection and the protection sought is no more than is reasonable, having regard to the parties and the public’s interest.

Comment

This case highlights that employers can include bonus clawback provisions in an employee’s contract of employment. However, you should take care when drafting such provisions and be mindful of the following:

  • The provisions should be reasonable. You should be able to show that the detriment to your employee is proportionate to your legitimate interest in clawing back the bonus payment.
  • It is important to establish the aims and effects of the clawback provision and ensure that it is not designed to restrain an employee’s future work.
  • You are prohibited from receiving any payment from a worker unless the payment has been authorised, so you should seek express written consent to the clawback provisions from the employee.

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