Restraint of trade

When considering a complaint of restraint of trade, tribunals must assess to what extent (if at all) the relevant clause restricts the employee's activities, post-termination. In Steel v Spencer Road LLP (trading as The Omerta Group), the High Court held that a contractual bonus clawback provision did not constitute a restraint of trade as it did not restrict Mr Steel's ability to work elsewhere after leaving Omerta.

Basic facts

Mr Steel was contractually entitled to a basic annual salary plus a discretionary bonus scheme if he continued to work for Omerta for three months after the bonus was paid and did not give notice to terminate during that period.

In January 2022 he received a bonus of £187,500 but then gave notice to quit his job a month later. When he refused to pay back the bonus under the clawback provisions of his contract, Omerta served a statutory demand for the full amount.

Mr Steel applied to the Insolvency and Companies Court (ICC) to set aside the demand, arguing that the bonus clawback provisions were an unreasonable restraint of trade and were, therefore, unenforceable, among other things.

Restraint of trade

Although there is no exhaustive test, courts must ask two questions when considering a restraint of trade complaint:

• Is there, in fact, a restraint of trade?
• Is the restriction reasonably necessary to protect the legitimate interests of the parties?

ICC decision

Dismissing his claim, the ICC held that the bonus clawback provisions did not operate as a restraint of trade as they did not restrict Mr Steel's ability to work elsewhere after resigning from Omerta.

Whilst acknowledging that there might be circumstances where the severity of the consequences of this type of scheme were disproportionate to the benefit received, that consideration did not apply in this case as the conditions attached to the bonus payments were "very moderate".

Mr Steel repaid the bonus but appealed the decision on restraint of trade, arguing (among other things) that:

• The judge should have considered other clauses in his contract which disincentivised him from resigning. These included the requirement to give three months’ notice (meaning that he had to stay on for six months after the bonus was paid) and a post-termination restrictive covenant, which included a 13-week restriction on working for a competitor.
• The judge had conflated the two stages of the test when he concluded that the restraint of trade doctrine could only be engaged by bonus clawback provisions that were out of all proportion to the benefit conferred.

High Court decision

Although the High Court accepted that a bonus or commission scheme which requires an employee to stay in their job for a specified period might put them off from handing in their notice, that possibility did not turn the provision into a restraint of trade. In any event, in this case, Mr Steel’s contract did not contain other clauses that imposed restrictions on where he could work after he left Omerta. Nor did the post-termination restrictive covenants have any bearing on interpreting the bonus clawback provisions.

It also dismissed the argument that the ICC judge had conflated the two stages of the test. Although the first and second steps might sometimes overlap, the judge had clearly concluded that none of the facts relating to the reasonableness of the provisions needed to be considered at the first stage of the analysis. In carrying out this exercise, he addressed Mr Steel’s argument that the penalty imposed on him for resigning was so severe and out of proportion to the benefit incurred that the bonus clawback provisions amounted to a restraint of trade.

The appeal was therefore dismissed.