The Law Dictionary

Your Free Online Legal Dictionary • Featuring Black’s Law Dictionary, 2nd Ed.

Employer Clawback Provisions: Definition and Examples

Manager in an office going over a clawback provision with a new employee

If you sign an employment contract at a hedge fund, investment bank, or other finance business, you may agree to clawback provisions unintentionally. These clauses became popular as a way to build public trust. In 2005, fewer than 3% of employee contracts contained clawback language. By 2010, that number increased to 82%, with no signs of this trend slowing down. This overview discusses clawback policies, their impacts, and examples to look out for in employment contracts.

What Is a Clawback Clause?

When you find clawback language in an employment contract, this allows an employer to demand the return of money already paid to an employee. They are common in any employment contract that includes a sign-on bonus, incentive pay, or other forms of executive compensation.

Employers always used clawbacks, but more appeared after the Sarbanes-Oxley Act passed in 2002. Intended to create better financial accountability in business, the statute required executive bonuses to be repaid or forfeited if noncompliance or misconduct arose from creating financial statements. Later, the Emergency Economic Stabilization Act of 2008 made clawback clauses a condition of an economic bail-out.

When Are Clawback Provisions Relevant?

Here are some common situations where employers may try to enforce a clawback clause:

  • Sign-on bonus: Sign-on bonuses attract talent and encourage retention. Many depend on the employee remaining at a company for a set time, usually one to three years. A clawback clause may require the employee to pay back their sign-on bonus if they leave before that time.
  • Incentive pay: Incentive pay includes yearly bonuses, short-term wage increases, stock options, and sales commission. If incentive pay was based on inaccurate financial information or employees committed fraud, the clawback clause can go into effect.
  • Violations of non-compete agreements: Many companies use non-compete agreements to protect their trade secrets. Employees subject to them can’t work for a competitor for a set period after leaving their job. If an employee violates the agreement, the employer may use the clawback provisions to request repayment and penalties of salary increases, bonuses, and commissions.
  • Fraud and mismanagement: Clawback clauses are frequently used when an employee or executive commits fraud or mismanages company funds. The provision may require the executive to forfeit any bonuses and pay penalties.

What Are Examples of Clawback Provisions?

Clawback clauses intend to compensate the employer for employee misconduct but are also punitive. You will likely find clawback language in the contract section discussing incentive compensation or bonuses. Another place you may find them is among any provisions concerning discipline.

One clawback provision example arises from Nike, Inc.’s incentive compensation policy. The provision applies to performance sharing, long-term incentives, and deferred compensation plans. It requires funds from these programs to be repaid if an executive engages in misconduct.

This example refers to wrongful conduct:

Clawback. This Agreement is subject to any written clawback policies that the Company, with the approval of the Board or the Committee, may adopt to the extent allowed by applicable law. Any such policy may subject your RSUs and amounts paid or realized with respect to the RSUs under this Agreement to reduction, cancelation, forfeiture or recoupment if certain specified events or wrongful conduct occur, including but not limited to an accounting restatement due to the Company’s material noncompliance with financial reporting regulations or other events or wrongful conduct specified in any such clawback policy adopted by the Company, including any policy to conform to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and rules promulgated thereunder by the Securities and Exchange Commission and that the Company determines should apply to this Agreement.

Another example discusses a non-solicitation agreement and stock bonuses:

Clawback. Notwithstanding anything in the Plan or this Agreement to the contrary, in the event that the Participant breaches any nonsolicitation agreement entered into with, or while acting on behalf of, the Company or any Affiliate, the Committee may (a) cancel the Award, in whole or in part, whether or not vested, and/or (b) if such conduct or activity occurs within one year following the vesting of any portion of the Award, require the Participant to repay to the Company any shares received with respect to the Award (with such shares valued as of the vesting date). Such cancellation or repayment obligation shall be effective as of the date specified by the Committee. Any repayment obligation may be satisfied in shares of Stock or cash or a combination thereof (based upon the Fair Market Value of the shares of Stock on the date of repayment) and the Committee may provide for an offset to any future payments owed by the Company or any Affiliate to the Participant if necessary to satisfy the repayment obligation; provided, however, that if any such offset is prohibited under applicable law, the Committee shall not permit any offsets and may require immediate repayment by the Participant.

One pattern you will notice with these examples and others is that they will specifically mention clawback. If you receive a PDF of your employment agreement, it may be worth the time to search on the word “clawback” and see what comes up.

Do Any States Prohibit or Restrict Clawback Provisions?

States do not prohibit clawback provisions, but they could require that these clauses be in writing and in contracts that both employer and employee sign. If any clawback language is vague, it is likely not enforceable, and employees can take legal action against their employer if it deducts bonuses from their wages.

That said, clawback clause enforceability often depends on how state law defines wages. Most states consider earned commissions wages and restrict deductions from base wages to cover commission overpayments. The Texas Payday Rules require written authorizations and notice before making deductions subject to a clawback clause or other wage overpayments. Minnesota statutes require the same written notice or authorization.

There are also time limits on when an employer can deduct bonuses from wages or future bonuses. Michigan employers have six months to collect from future wages after overpaying. New York employers have six years to collect.

Are Clawback Provisions Enforceable?

Yes. But the employment contract or compensation agreement must communicate clawback language clearly. Generally, if you’re an employer seeking to implement a clawback clause, be confident that it:

  • Specifically describes the penalty: You must describe what triggers the clawback clause and the penalty amount. For example, a contract may define fraudulent transactions and explain that results in executives returning 100% of a bonus.
  • Penalty determination: Employers must describe how they assess penalties. For example, the Board of Directors may impose a higher penalty for fraud than if an overpayment resulted from a clerical error.
  • Triggering events: Possible triggering events for a clawback procedure may include employee fraud, irreparable financial harm, misrepresented or inaccurate financial data, failure to complete the employment contract within the required time, or leaving employment to work for a competitor.
  • Time periods: Clawback clauses should not be enforceable for eternity, except under specific circumstances like law violations or fraud. Limit the time the clawback provision is enforceable, e.g., 30 days after bonus payment, two years after sign-on bonus, or 30 days after commission paid.
  • Who is subject to them: You may wish to limit clawback clauses to executive-level leadership or apply them to all employees who earn incentive-based compensation.

Need Help with Clawback Provisions in Your Employment Agreement?

Clawback provisions are frequently tricky, and you should know what you’re getting into before agreeing to compensation based on a contract that contains them. Get answers today by reaching out to a local employment lawyer near you.


This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

Recent Employment & Labor Law Articles