A clawback is a contractual provision that allows a company or organization to recover compensation or benefits that have already been paid to an employee or executive. This provision is typically included in employment contracts or bonus plans, and it allows companies to recover compensation if certain conditions are not met.

The primary purpose of a clawback provision is to incentivize good behavior and ensure that employees are held accountable for their actions. For example, a company may include a clawback provision in an executive’s contract that requires them to repay a portion of their bonus if it is later discovered that they engaged in unethical or illegal behavior. By including a clawback provision, the company is able to recover compensation that was paid out based on false or misleading information.

Clawback provisions can also be used to recover compensation if an employee leaves the company before completing certain tasks or meeting certain goals. For example, a company may include a clawback provision in an employee’s contract that requires them to repay a portion of their signing bonus if they leave the company before a certain period of time has elapsed.

While clawback provisions are often seen as a way to hold employees accountable, they can also be controversial. Some critics argue that clawback provisions can be too punitive, and that they can discourage employees from taking risks or pursuing innovative ideas. Others argue that clawback provisions are necessary to ensure that employees are held accountable and that companies are able to recover compensation that was paid out based on false or misleading information.

Despite the controversy surrounding clawback provisions, they are becoming increasingly common in employment contracts and bonus plans. In fact, many companies are now required by law to include clawback provisions in their executive compensation plans. The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, requires publicly traded companies to include clawback provisions that allow them to recover compensation from executives who engage in misconduct.

A clawback is a contractual provision that allows a company or organization to recover compensation or benefits that have already been paid to an employee or executive. While controversial, clawback provisions can be an effective way to hold employees accountable and ensure that compensation is based on accurate and truthful information. As such, they are becoming increasingly common in employment contracts and bonus plans.

Video Transcript

In this video, you will get answers to these questions:

  • What Is a Clawback?
  • When Are Clawbacks Used?
  • What Is an Example of a Clawback?
  • What Can You Do If There Is a Clawback of Money You Own?

What is a clawback? In law, what does a clawback mean? When is it used? What does that look like? That’s the question I am answering today.

I’m Aaron Hall, an attorney representing business owners and entrepreneurial companies. If you are a business owner, I am providing you with this information as education to help you identify issues to discuss with your attorney. It is not a replacement for an attorney. It is to help you be proactive, to avoid problems in your company, and identify the issues that you need to know to be more capable and strengthen your company. If you don’t already have the, “Seven Common Legal Mistakes Made by New Businesses” that I put out, you can get it for free at aaronhall.com/free/.

What Is a Clawback?

What is a clawback? Clawback simply means, and this is what I imagine, a claw, reaching out, grabbing money and pulling it back. So, a clawback relates to money typically, but I suppose it could relate to property as well. But generally, it is used as far as money to reach out, grab funds, and pull them back to be used for some other purpose.

When Are Clawbacks Used?

All right, when are clawbacks used? A common type of clawback is when there has been a scam. When a scam occurs, the courts may appoint a receiver or a trustee. This is somebody appointed to try to get back money that related to the scam to divide it among the victims. So, let’s say you were one of the early victims and you got some of your money back, but the later victims didn’t get any money back. In this case, the receiver could claw back the money from you, even though you were a victim, and then divide the money evenly among all of the victims out there. So scams are often an example of when a clawback is used to pull back money to a receiver, to then divide that among the victims.

What Is an Example of a Clawback?

Another example of a clawback is in bankruptcy law, where there has been some sort of fraudulent transaction or a transaction with a family member, the bankruptcy trustee may claw back that money. I will give you an example. Let’s say that you file for bankruptcy. But just before you do, you transfer a hundred thousand dollars to your sister. Well, the bankruptcy trustee is going to look at that as a fraudulent transaction and can claw back that money from your sister. Your sister might say, “That’s my money. I own it. Nobody can take that away from me. It was a gift.” Now, under federal bankruptcy law, the trustee has the authority, at least for a certain period of time, to pull back that money. They can take it from a bank. They have incredible power as a bankruptcy trustee.

One final example of a clawback might be a contractual clawback provision. For example, you might sign a contract that says, “If I don’t do something, you can claw back the money that you paid me.” So again, the concept is the same: clawing back money. But there are different contexts. It can either be authorized by a contract, authorized in the bankruptcy code, or authorized by a court for some other purpose. And there are other statutes and laws that allow for clawback in rare circumstances.

What Can You Do If There Is a Clawback of Money You Own?

Well, first you will want to talk to an attorney who is experienced in dealing with clawbacks. This is a real niche area of law, and so most attorneys have not encountered clawbacks before. It would be an attorney who has represented victims of a scam. It might be an attorney who represents banks, but by the way, if they represent banks, they probably will not represent you because that would be a conflict of interest. So usually attorneys who represent banks, exclusively represent banks. Or it might be another attorney who just like myself, a business attorney, who has encountered clawbacks in the law and in circumstances with my clients over the years.

Conclusion

I have been on both sides of clawbacks where my client was at risk of money being clawed back or trying to get money clawed back for my client. If you are encountering an issue like that, I would recommend you talk with an attorney in your jurisdiction; so in your state, somebody who can get to know your circumstances and who has experience in that area.

Now, if you want some free resources, make sure you have downloaded the, “Seven Common Legal Mistakes Made by New Businesses.” That is a PDF I put together to help you avoid some of the common problems that new businesses face. And as part of that, once you sign up to get that, and again, it is free, you will also get private videos from me. They are not publicly available, but they are explaining some of those concepts to help educate you so you can avoid common problems in your businesses.

If you like educational videos like this, you are welcome to subscribe to this channel so you know about future videos when they come out. If you have questions, feel free to put them in the question or comments section below. I use that section to identify topics for future videos to make, and I will also put in the description below some other resources that might be helpful to you.