Can an employer claw back a paid bonus?

Order a bottle of champagne! Not only have you worked really hard this year to smash your targets and qualify for a fantastic discretionary bonus – but on the back of all that hard work you have managed to secure yourself a dream job at another company!

You’re feeling pretty good about it.

Until you hand in your notice and your employer tells you that they are utilising the ‘bonus clawback provision’ in your employment contract and requiring you to repay your bonus, in full.

Can they do that?

On the face of it, it feels really unfair that an employee should be made to return a bonus payment that they feel that they have rightly earned.

Mr Steel certainly thought so in the recent case of Steel v Spencer Road LLP [2023] EWHC 2492 (Ch). He worked for a global executive firm on a basic salary of £65,000 with an annual discretionary bonus – a sizeable bonus! In January 2022 he was awarded a bonus of £187,500 and went on to resign in February 2022. On giving notice, he activated a clawback provision in his contract requiring him to repay any bonus if he left, was given, or gave notice within three months of the bonus payment.

The employer requested he repay the bonus and he refused, stating that it was unreasonable – so they sued him!

The High Court held that a contractual provision requiring an employee who had given notice of termination to repay a discretionary bonus (a “bonus clawback”) was not a restraint of trade, and the employer was entitled to rely on it and require its repayment. The provision did not restrict Mr. Steel from working elsewhere.

This case highlights the importance of making sure you understand the clauses in your employment contract before signing and the need to give proper consideration to its provisions (or any similar provisions to be found within any bonus-related paperwork issued separately) if you are thinking about leaving employment, particularly where such a clawback clause exists.  This case should also eradicate any lingering perception that clawback clauses aren’t worth the paper they’re written on – as this case, and a return of £187,500 proves, they absolutely are!

Torque Law regularly advises senior executives on the provisions of their employment contracts when entering or exiting a business and can support you in negotiating terms that put you in the strongest possible position, personally and professionally.