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Should You Have an Employee Benefit Clawback Provision?

By November 17, 2022December 16th, 2022HR

Employee leaving the office

Does your business offer prospective employees enticements like signing bonuses or moving expense reimbursement to enhance your recruiting efforts and attract talent during this competitive labor market?

If so, you may want to consider protecting yourself with what’s known as a ‘clawback’ provision if things don’t go as planned with a new employee. Adding this provision to your onboarding documents gives you legal recourse to recapture money that the employee shouldn’t be able to keep if they leave the company.

What is a clawback provision?
Legally, a clawback provision allows companies to reclaim money that they’ve already paid to an employee. While taking money back from an employee (or ex-employee) is awkward, it can be warranted when the employee fails to live up to their side of the deal.

For companies to have future recourse through clawbacks, their employment contracts should explicitly disclose that a clawback may be possible and provide examples of scenarios in which the employee will be expected to return money, property or other significant nonmonetary items.

In what situations can a clawback provision be helpful?
Companies often use a clawback if they award an employee a bonus based on job performance but they discover later that the information used for the performance assessment was incorrect.

As one high-profile example, the U.S. Securities and Exchange Commission voted in October to require companies that restate their financials due to compliance lapses to claw back excess compensation from their executives. In other words, executives who receive bonuses or other compensation based on inaccurate numbers shouldn’t be allowed to keep money that they didn’t truly earn.

For smaller businesses, clawback provisions may also help in situations such as:

  • Charging employees for costly job training they received before they quit.
  • Recapturing moving expenses if new hires flip too soon.
  • Recovering signing bonuses when new employees don’t remain for an expected duration of time.

As part of MarathonHR’s human resources administration services, we can help you develop written policies, including clawback provisions, that protect your business’s productivity and bottom line.

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