What Does Clawback Mean In a Contract?

Clawback in a contract requires that an employee returns the money paid to them by their employer. Remember that every employee signs a contract promising to deliver as the employer expects. However, when the performance report indicates otherwise, the clawback provision helps the employer solve the case. You have to pay the penalty aside from the refund according to the contract.

The clawback provision has enabled companies to prevent their managers from giving false accounting information. An example of clawback is when a company agrees with the CEO to increase its sales to 10% within a year and promises the CEO a reward of $100,000.

At the end of the stated time, the corporate financial reports show the company made 13%, and the CEO is awarded the promised amount. However, after an audit, the company realizes that the profits were over-reported and demands back the reward given to the CEO for failing to abide by the clawback provision.

What Is a Clawback RSU?

Clawback (RSU) restricted share units allow shareholders to claim repurchase rights for RSU after meeting specific vesting conditions that were part of the clawback agreement. However, in most cases, the RSU agreement enables an executive to receive the shares before vesting conditions are met.

Currently, RSUs are more popular because of their flexibility, allowing employers to select when to issue shares regardless of the vesting date. This helps organizations spend less on administrative costs and issuing shares. In some cases, employees might not get dividends from shares.

Can Your Company Take Back Your Vested Shares?

Yes, but this depends on the agreement on your clawback contract. A company gives employees a vesting schedule where they get to earn shares with time. When your options vest, you can buy the stock, and they become yours.

However, if you opt out of the company and have a clawback contract agreement, the company might force you to sell the shares to them. According to the agreement, you can sell the stock back at the price you bought it for or at the current market value at the end of the contract with the company.

What Happens to Vested Stock When You Quit?

When you quit, the vested stock will expire because they’re not exercised within the timeframe. This usually happens within 90 days after leaving the company. So, if you don’t exercise them within this timeframe, you’ll lose them, and most organizations do this in agreement with ISO’s and IRS regulations. However, this has been challenged by most people, which has seen some companies extend the timeframe.

Are Clawbacks Enforceable?

Clawbacks are legally enforceable if they are documented in writing and all the parties sign before or when the bonus is awarded. However, if the employees aren’t aware of any bonus payment, the employer can introduce a clawback provision with new conditions before granting the bonus.

But there are instances when an employee can challenge the clawback provision terming it as a penalty clause or restraint of trade. This is if the employer doesn’t craft clawback provisions with utmost care.

The instances when the clawback is not enforceable include;

  • If the repayment arises because of a breach of contract, it penalizes the employee and does not compensate them for the loss they are facing. In this case, this will be termed a penalty clause.
  • If an employee breaks the restrictive laws like going to a competitor. Here the clawback provision will be seen as restricting the future freedom of employee’s activities.

Challenge Your Clawback Contract with Our Attorney

Before signing any clawback contract with your company or employer, it’s best to understand its terms and conditions. This will enable you to get dividends, stock, or shares that are rightfully yours without being played by anyone. However, if you feel your company or employer is breaching the contract agreement, look for experienced attorneys to help solve the issue.