Bonus Clawback Provision Held Not to be a Restraint of Trade

Georgia Veitch
Georgia Veitch
Trainee Solicitor
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A recent High Court case has ruled that a clause in an employee’s contract that required a bonus to be repaid if his employment was terminated within three months after it was paid, or if he gave notice to terminate his contract within that period (a type of bonus clawback provision), was not a restraint of trade.

Restraint of trade (sometimes referred to as restrictive covenants) refers to terms in a contract of employment that restrict an individual’s freedom to carry out their trade or business or to work for others. Where these terms are not designed to protect legitimate business interests, or where they are, but they go further than is necessary to do so, they are unenforceable by the employer.

In this case, the High Court accepted that the clause requiring repayment of the bonus in the three-month period did operate as a disincentive for the employee to resign, however, that this in itself did not mean that the bonus clawback provision acted as a restraint of trade as it did not restrict the employee from working elsewhere. The High Court therefore held that the employer in this case had been entitled to claim back the bonus as the employee had resigned within the three month period.

Whilst this case focused specifically on a clause requiring the repayment of a bonus, it is a useful reminder that the basis for any contractual repayment obligations imposed upon an employee by an employer as a protective mechanism (whether in relation to bonuses or, for example, training costs) should be carefully drafted to ensure that the provisions go no further than necessary to protect the employer’s interests. Where such clauses are drafted appropriately, they can be a useful mechanism for employer use when paying out large sums of money to employees, particularly where there is a risk that the employee will leave employment shortly after.

If you would like to discuss the use of clawback provisions, or if you have any other employment law queries, please do not hesitate to contact a member of the team on 0141 331 5150.

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