Clawing Back Bonuses When Is It Enforceable?
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...in Tullett Prebon v BGC Brokers (2010). The provision was not a restriction of trade because it did not effect the employee’s activities once the employee had left the employer. Nor was it a penalty clause, because the clawback was not reliant on the employee breaching his contract.
Retaining talent v shareholder activism
One of the principal purposes of having a bonus or share incentive scheme is to ensure that talent is recruited and retained by an organisation. If an employer develops a practice of aggressively clawing back bonuses, the scheme will be undermined and...
...the employment relationship may become fraught. On the other hand, shareholders are becoming increasing vociferous, especially in relation to public companies - as recently seen with Cairn Energy, where earlier this year its original founder and former chief executive’s bonus was effectively blocked by the shareholders. Under the Companies Act 2006, even minority shareholders have the right to require directors to call a general meeting and force resolutions onto the agenda of an annual general meeting (public companies), thus requiring directors to justify their remuneration packages.
The management of a company have to juggle the interests of the shareholders whilst ensuring that it offers incentives to its employees which ensure that it is able to recruit and retain the appropriate talent.
Remedies available to an employee
Unless the bonus arrangements are carefully drafted and the circumstances in which an employer can clawback a bonus are objective and reasonable, the employer may find itself facing an action for breach of contract (including breach of the implied term of trust and confidence) or unlawful deduction of wages. Complaints of discrimination may follow if certain employees feel targeted and they believe this is only because of a protected characteristic.
Whether a clawback will be permitted will mainly be down to... continued on page four >