TIME TO GET YOUR CLAWS OUT?

We all know that bonuses can form a key part of an employer’s retention strategy. However, we also know that the period immediately following the payment of bonuses is when we tend to see a spike in resignations. This can be frustrating, especially if the employee has waited to bank a substantial bonus and then adds insult to injury by leaving to join a competitor.
 
One option to consider if you want to encourage employees to stay on after receiving their bonus is the introduction of a bonus clawback if the employee leaves within a certain period of receiving a bonus. This is precisely what happened in the case of Steel v Spencer Road which was reported this month. The employee’s contract stated that they must stay in employment and not serve notice for three months after being paid a bonus, otherwise the full bonus amount would become repayable. Steel resigned within three months of receiving a substantial bonus and his employer issued a demand for repayment of the bonus plus legal fees. Steel challenged the validity of the clawback mechanism, arguing that it was an unlawful restraint of trade because it unreasonably restricted his ability to ply his lawful trade with another employer. The High Court dismissed his argument, concluding that, whilst it is accepted that clawback mechanisms are designed to discourage employees from leaving, this does not make them an unlawful restraint of trade (the point being that the employee still has a choice whether to leave or not if they are willing to pay the price).
 
With the current uncertainty around potential changes to the enforceability of restrictive covenants (and non-compete clauses in particular), employers who are concerned about key employees leaving to join a competitor would do well to consider whether to introduce a bonus clawback mechanism as an additional disincentive.