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Clawback Provision

Ali Azhar
Last Updated January 4, 2022 4:58 am

The clawback provision is a clause in an employment or business contract that allows the company to reclaim the money, bonuses, stocks, dividends, or incentives that have been previously paid to an employee or executive.

What does the clawback provision do?

This clause allows companies to have a form of guarantee in situations where the employee has violated the code of conduct, failed to meet some portion of the terms of their employment, has committed fraud, or has performed poorly at their job. Some companies are also able to claim clawback provision if there has been a drop in company profits. 

In some cases, mortgage lenders also use the clawback provision to claim money from unprofitable mortgages. The clawback provision is common in employment contracts. It is particularly common with the employee sign-on bonus, which is received at the time of joining. If there is an early termination of employment, the clawback provision allows the company to get back the sign-on bonus. 

Clawbacks within the tech sector

Within the tech sector, clawback provisions are often a part of compensation packages. In these cases, startups and tech giants like Amazon offer generous benefits, signing bonuses, and retention bonuses with the provision that an employee will stay at the company for a set amount of time. Should the employee leave before that time is up, the company may invoke the provision and requires the employee to pay back some or all of the benefits.

Is there a clawback fee?

Clawback provision is different from repayment or refunds, as there is often a penalty or fee with a clawback. This means the clawback provision will require additional funds to be paid by the employee to settle the case. 

Is a clawback agreement legal? 

Several federal and state laws allow clawback agreements to be used as part of a business or employment contract. This makes it legal, however, not all types of pay are eligible for the clawback agreement. employee’s 401K plan and wages might be immune from the provision depending on the contract and applicable laws. 

Notable cases of the clawback provision’s use

In 2017, Wells Fargo used the provision to get $69 million from the former CEO of the company, John Stumpf, and $67 million from the head of community banking, Carrie Tolstedt. This was based on a fake-accounts scandal in which retail bank accounts and credit cards were opened without customers’ knowledge. This case marks is the largest clawback in U.S. banking history. 

In 2007, the former CEO of UnitedHealth Group had to pay back $400 million in stock options and compensation as a result of an investigation of practices of the company. The clawback provision was used to claim this amount.

In 2005, the former CEO of Tyco, Dennis Kozlowski agreed to return $500 million as an end to a long-running clawback dispute. This amount was at least seven years’ worth of earnings of Kozlowski. He was convicted of using Tyco money to fund his extravagant lifestyle and issue unauthorized bonuses. Along with the clawback money that he had to return, Kozlowski was sentenced to eight years and four months in jail.