Traditionally, an employee's entitlement to a bonus, whether fixed or discretionary, was regarded as a contractual matter. However, more recently, regulatory requirements have seen financial services sector employers imposing clawback and/or malus provisions (which allow the withholding of a sum) to enable the reclamation of part or all of an employee's bonus. The UK Corporate Governance Code also recommends that listed companies include clawback provisions in their bonus schemes.
This approach is rarely seen outside the financial services and listed company arenas. However, more companies now seem to be considering this option – with more one-off "sign on" bonuses being conditional upon, or repayable under, certain circumstances. There are clear advantages to such clawback and/or malus provisions. It can certainly be detrimental to staff morale if an employee receives a bonus, only to behave inappropriately shortly afterwards. So what do employers need to consider if seeking withhold or clawback bonus?
The AA recently hit the headlines for demanding its former chair, Bob Mackenzie, repay £1.2 million worth of bonus payments following an alleged altercation with another executive from the company. This was despite the lack of any contractual provision entitling it to do demand repayment.
To avoid the litigation that the AA is now facing if it wants repayment, it is important to remember that drafting is key. The terms of the employment contract and/or bonus scheme must be well drafted to ensure that the bonus can actually be clawed back or withheld in the desired circumstances. Care needs to be taken to ensure that the relevant clause does not become a penalty clause or a restraint of trade. There may also be tax consequences in clawing back payments. HMRC has recently provided helpful guidance in relation to this.