The enforceability of clawback clauses are strengthened in a recent High Court decision
10 November 2023
10 November 2023
Clawback is the recovery of variable remuneration, such as a performance-linked bonus or share award, which has already been paid to an employee or already vested. This may be invoked where there is a subsequent discovery (for example, employee misconduct), or consequent events occur (such as an error in calculating performance) which mean that an employer wants to recover amounts already paid to an employee.
From a practical point of view, clawback can be difficult to implement since it involves recouping money (or shares) that have already been paid or transferred to the employee. Further, it is particularly difficult to clawback a bonus or shares where the employee has left their employment.
For certain firms regulated by the Prudential Regulated Authority or Financial Conduct Authority operating in the financial services sector in the UK, clawback of bonuses is mandatory. Further, UK listed companies are expected to implement clawback provisions for executive directors' bonuses and share awards under investor guidelines. It is therefore a "hot topic" in remuneration.
Given their prevalence in senior managers' and executive directors' bonus agreements and share plans, it is therefore comforting for employers that in the recent High Court decision of Steel v Spencer Road LLP (the Steel case) it was found that clawback provisions requiring pay-back of a bonus upon termination of employment were not an unreasonable restraint of trade.
Restraint of trade can occur where an employer restricts an employee from working by imposing, for example, post-termination restrictions on them such as a non-compete clause. To be enforceable an employer must demonstrate that the restraint is protecting a legitimate business interest and goes no further than is reasonably necessary to protect that interest.
Mr Steel participated in a discretionary bonus scheme. Payment of the bonus was conditional upon Mr Steel remaining in employment for three months after it was paid, and that he had not given or received notice to terminate his appointment during that period. Significantly, the clawback clause did not also say he could not work for a competitor or otherwise breach his restrictive covenants – Mr Steel simply could not resign.
In January 2022 Mr Steel was paid a bonus of £187,500 which was significantly higher than his £65,000 basic salary. Mr Steel gave notice of termination of his employment a month later. His employer requested the bonus repayment under the clawback provisions in his employment contract. Mr Steel refused and was served with a statutory demand. Mr Steel argued that the bonus clawback provisions in the contract operated as an unreasonable restraint of trade or were penalty clauses and were therefore unenforceable.
The High Court's decision considers an appeal by Mr Steel after his application was dismissed and he had repaid his bonus.
The central issue that the High Court had to consider was whether a bonus clawback which is conditional on remaining in employment for a certain period of time is a restraint of trade.
Following previous case law, the High Court recognised such a provision is a disincentive to the employee resigning. However, that doesn't turn the provision into a restraint of trade restricting the employee's ability to work after he left his current employer. Furthermore, this disincentive to resign and Mr Steel's additional three-month notice period, which effectively meant that he would have to remain working for six months to retain his bonus, did not further the argument of a restraint of trade.
Significantly, Mr Steel's employment contract contained other restrictive covenants which were not included within his grounds of appeal. The analysis was therefore not affected by the post-termination restrictive covenants – they were distinct from and separate from the clawback provisions.
The decision echoes the verdict in Tullett Prebon plc and others v BGC Brokers LP and others [2010] in which the High Court held that provisions requiring employees to repay certain loyalty bonuses if they resigned within a certain period were not in restraint of trade as they did not restrict the employees' activities after they left.
Clawback provisions have become standard for many firms and companies so this decision is welcome news for such employers. On the basis of the Steel case, it is acceptable to include a clawback ground which prevents an employee from resigning within a reasonable period of time post-payment.
The question, which was not considered in the Steel case, is whether clawback can be implemented if there has been a post-termination breach of a restrictive covenant? Would this constitute an unlawful restraint of trade?
This very point was considered in Marshall v NM Financial Management [1997] in which a post-termination commission provision would cease if Mr Marshall went to work for a competitor. Here it was found there was a restraint of trade that restricted the claimant's freedom to carry on particular forms of trade after the termination of his appointment. It was reiterated in the Steel case that a clawback ground which goes further and prevents an employee from working for a competitor is distinct from simply preventing an employee from resigning.
This was reflective of the earlier decision in Sadler v Imperial Life Assurance Company of Canada Ltd [1988], where an employee's right to receive post-termination commission was subject to a term that payments would cease immediately if the employee moved to a competitor. Again, this was held to be an unlawful restraint of trade.
These earlier cases are clearly distinguishable from the Steel case, on the basis that the facts in Steel said Mr Steel could not resign – the bonus clause did not go further and say he could not work for a competitor.
Employers should therefore continue to act with caution in imposing clawback grounds which restrict where an employee goes to work post-termination, and ensure that this restraint is protecting a legitimate interest in these cases.
There are a number of key legal and practical issues arising from clawback which employers should consider carefully including:
For more information of any of the issues raised in this briefing, please speak to your usual Ashurst contact or to any of the people whose contact details are given below.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.