Using Clawback Provisions for Employee Incentive Pay

Law360

Jeffrey H. Ruzal, Member of the Firm, and Carly Baratt, Associate, in the Employment, Labor & Workforce Management practice, in the firm’s New York office, co-authored an article in Law360, titled “Using Clawback Provisions for Employee Incentive Pay.” (Read the full version – subscription required.)

Following is an excerpt:

This article addresses the wage-and-hour implications of clawback and forfeiture provisions and provides drafting considerations for incentive compensation agreements. Clawback provisions require employees to pay back money to employers that they already received whereas forfeiture provisions provide that employees forfeit the right to receive money when specified conditions occur.

The article covers the types of compensation often subject to clawback and forfeiture provisions and addresses the circumstances where payments may or may not be forfeited or clawed back. It also discusses whether compensation subject to a clawback/forfeiture provision constitutes “wages” under state law. …

What Are Clawback and Forfeiture Provisions?

Clawback Provisions

Clawback provisions are contractual terms that require an employee to repay compensation he or she received from an employer upon the occurrence of a designated event, such as an employee’s termination for cause or violation of a restrictive covenant (e.g., a provision prohibiting competition with the employer, solicitation of clients and employees, and disclosure of the employer’s confidential information).

Forfeiture Provisions

Forfeiture provisions are contractual terms that provide for automatic forfeiture of certain compensation where an employee fails to meet designated preconditions for such compensation. For example, an employee’s contract may provide for payment of a bonus on a particular date so long as the employee is still employed on that date and has not engaged in any misconduct. If the employee resigns before the specified date or commits misconduct, the employee would automatically forfeit any right to payment of the bonus.