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This article was first published by ELA Briefing.
The case of Steel provides a helpful reminder of the law relating to the interaction of restraint of trade and bonus clawback provisions, highlighting the difference between an unenforceable restraint of trade and protective provisions within a contractual remuneration package that disincentivises certain behaviour.
Mr Steel worked for The Omerta Group (Omerta), a global head-hunter company, looking for talent for investment banks, private market investing, investment managers, private equity and hedge funds. As part of his terms of employment, Mr Steel received a basic salary and an annual discretionary bonus. In January 2022, Mr Steel received a discretionary bonus of £187,500 (an amount considerably larger than his basic salary, which at the time was £65,000 a year). A few weeks later, Mr Steel resigned in order to join a competitor of Omerta.
Mr Steel's employment contract contained a clawback provision that required him o repay his discretionary bonus if he left or was given or gave notice within three months of it being paid. Accordingly, when Mr Steel resigned in February 2022, Omerta asked him to repay the bonus he had received in January 2022. Mr Steel refused to do so.
As he continued to refuse to repay the bonus, Omerta served Mr Steel with a statutory demand for repayment. Mr Steel applied to the Insolvency and Companies Court (ICC) for relief, which can set aside a statutory demand if the debt is disputed ‘on grounds which appear to the court to be substantial’. Mr Steel argued that this test was satisfied because the clawback provision in his contract amounted to an unreasonable restraint of trade and/or a penalty clause and, consequently, was unenforceable.
The restraint of trade principle is based on the idea that an individual should be free to work without undue interference. Contractual terms purporting to restrict this freedom to work or carry out a trade or business will be deemed to be void unless they go no further than is necessary to protect a company's legitimate business interests. Assessment of whether a clause falls foul of the restraint of trade doctrine therefore requires a two-stage analysis: (i) whether the clause is in fact a restraint of trade; and (ii) if it is, whether it is reasonable with reference to the interests of the parties and the public.
The ICC dismissed Mr Steel's application on the basis that the clawback provision was not a restraint of trade as it did not restrict him from working elsewhere. The ICC judge relied on the judgment of Jack J in Tullett in support of this proposition. The ICC judge commented that there might be circumstances where the severity of the consequences of a clawback clause were clearly out of all proportion to the benefit received but, in the present case, he considered that this was not arguable. Indeed, the judge described the clawback provisions in this particular case as ‘very moderate’. The ICC judge also dismissed the argument that the clawback provision amounted to a penalty clause.
After losing in the ICC, Mr Steel repaid the bonus to Omerta, but also appealed the ICC's decision on the question of restraint of trade to the Chancery Division of the High Court. He did not appeal the question of the clawback provision being a penalty clause.
Bacon J dismissed Mr Steel's appeal and held that<
Bacon J also rejected the suggestion that this was a novel or developing area of law. In issuing her judgment she has perhaps made that the case, since it is now clear, at least from the perspective of the High Court, that Tullet established the precedent that bonus clawback provisions in contracts of employment will not, without something unusual or additional, be in restraint of trade even if they require the employee to remain in employment for a specified period to avoid their effect. The potential door that the decision in 20:20 London seemed to have opened to arguing to the contrary has now been closed.
If employers wish to prevent their employees leaving without much warning, clawback provisions are worth considering. This case shows that clawback provisions can serve as a strong disincentive to leaving and are less likely to be vulnerable to challenge via the courts than post termination restrictions (which are far easier to challenge, at least on an interim basis, even if, ultimately, they are found to be enforceable).
Steel Steel v Spencer Road LLP (t/a The Omerta Group)  EWHC 2492 (Ch)
ICC Insolvency and Companies Court
PTRs Post-termination restrictive covenants
Tullett Tullett Prebon v BGC Brokers  EWHC 484 (QB)
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