HR Administration

Clawback provisions: A safety net against employee fraud losses

By JD Farrugia

Nov. 22, 2022

Summary

  • Clawback provisions are usually included as clauses in employee contracts and are used to recoup funds and incentive-based benefits in predetermined situations. 

  • Clawback clauses can be used in various situations and across different industries, from clawing back bonuses unrightfully awarded to company executives to funds given on unprofitable home loans.

  • Setting up a clawback policy for your company ensures that, should you ever need to recoup funds from your employees, the procedures to do so are in place and transparent.


Imagine you’re a restaurant owner with a team of people you pay by the hour. You find out that one or more of your employees have been falsifying their time cards and that you have lost a significant amount of money to time theft.

Or maybe you run a retail store and offer your sales team a commission over and above their monthly salary. You then find out that one of your employees has been over-reporting on their performance and has received bonuses that they weren’t rightfully entitled to. 

In either of these situations, you could be legally entitled to a refund of the money you’ve spent through clawback provisions. 

Clawback provisions are clauses that are sometimes found in employment contracts that allow a business to reclaim money that has already been paid out to the employees in the case of misconduct, unethical behavior, or poor performance. 

Clawback provisions can be used in a number of scenarios to help employers recoup losses — from senior executives breaching contracts to government contractors delivering substandard work. As an employer, setting up a clawback policy will standardize the process while ensuring that you stay compliant with local, state, or federal law. 

Situations in which clawback provisions can apply  

From high-level executive compensation to clawback policies used in retail stores, there are a number of different situations where companies may utilize such clauses. 

  • Time theft — when employees who are paid by the hour falsify the number of hours they have worked. This also includes buddy punching, where colleagues clock in on each other’s behalf. 
  • False performance report some employees receive commissions and bonuses based on performance. Clawbacks can be used if it transpires that an employee has over-reported their performance to receive these benefits. 
  • Government contracts — in situations where contractors do not carry out the work as outlined in their contracts or if the work isn’t done to a specified quality. The funds received for this contract can be clawed back.  
  • Executive compensation — used when company executives breach a contractual agreement. One such agreement could be that they are not allowed to work for a competitor until a certain period of time elapses. 
  • Life insurance — insurance companies can claw back any payments the customer has received if they cancel their policy.  
  • Pensions — if there is any evidence of fraud or misuse of information by the pensioner, companies can claw back amounts given for pensions. 
  • Mortgage lending — banks and mortgage companies can recoup money given out for home loans if they turn out to be unprofitable. 
  • Medicaid reimbursement — if a Medicaid recipient dies, states grant Medicaid offices the possibility to recoup money paid toward healthcare. For example, if the Medicaid office has preemptively spent funds on nursing home costs, and this is no longer needed since the patient has passed away. 

Setting up a clawback policy

Setting up a clawback provisions policy and writing it into employee contracts usually falls to a company’s HR team. There are seven steps to keep in mind when introducing clawback clauses into your organization’s policies.

  1. Identify the types of funds or compensation that are applicable to your company’s clawback clause. Will your clauses cover things like bonuses, stock options, carried interest, and overtime?
  2. What penalties will you add on over and above the reinstatement of funds? This includes further fees and/or disciplinary action.
  3. To which employees does your policy apply? It might not be relevant for employees who do not receive incentive-based compensation. You may also decide that such measures are only applicable to senior executives.
  4. In what situations will you utilize a clawback? What are the events that will trigger it? These could be based on things like underperformance, overreporting, time theft, or even through actions that could have reputational and financial consequences on the company. 
  5. What is the period of time in which a clawback is applicable? What is the cut-off point from when a bonus is received that allows a company to claw it back?
  6. Who is in charge of enforcing, and what type of discretion do they have? If executives are subject to clawbacks, you will need to go as high up as your board of directors.
  7. What are the laws or regulations in your state that regulate clawback provisions? You need to ensure that your policy does not contradict any applicable laws. 

How federal law regulates clawback provisions

Over the past couple of decades, situations have arisen that led to clawbacks forming parts of federal statutes. 

The Sarbanes-Oxley Act of 2002 (a.k.a. SOX Act of 2002) was passed as a result of a number of scandals involving the misuse of funds in some high-profile public companies such as Enron and Worldcom. The US congress passed the law, which created stronger guidelines for the recordkeeping and reporting of accounting information. It allowed for clawbacks of bonuses and incentive-based compensation from executive officers in the case of abuse. 

The Emergency Economic Stabilization Act of 2008 (EESA) was passed in response to the financial crisis of that same year that came about primarily from the prevalence of subprime mortgages. The EESA allows for clawbacks in cases where there is inaccurate financial reporting and also requires more accountability amongst executives. 

The Securities and Exchange Commission (SEC) rule in 2015, associated with the Dodd-Frank Act of 2010, allows for clawbacks of funds paid to executives in the case of an accounting restatement.

Airtight time and attendance can reduce clawbacks four hourly businesses

Clawback provisions are a great way to ensure that your company is protected from misconduct and abuse. However, it is never ideal to be in a situation where clawbacks are necessary in the first place. Luckily, there are several things hourly businesses can do to prevent time theft and avoid clawbacks. 

An automated time and attendance solution makes it much more difficult for employees to carry out time theft. Paper timesheets are easily manipulated, and legacy time clocks allow for excuses surrounding lost or misplaced time cards. A cloud-based time-keeping solution like Workforce.com records employee hours in real-time, calculating pay instantly and compiling digital timesheets on a daily basis. You can then edit and export these timesheets directly to your payroll system come pay run.

Unlike outdated time clock hardware, Workforce.com lets employees clock-in via mobile device or tablet. All time punches are geo-located, meaning you’ll instantly know if an employee clocks-in early or late while not on-site. Managers can set up geofences as well to ensure staff can only clock in once they arrive at work. 

Alongside accurate data, you’ll need to create an extensive time and attendance policy. You should consider local, state, and federal time-theft regulations and build your policy from there. It should include information about clocking-in and clocking-out procedures, break time, and the use of phones and social media while on the job. You must communicate your policy well to your employees and ensure they take it on board. 

Finally, your policy must outline any disciplinary actions that will be taken in the case that it is broken. These preventative measures can start with a verbal warning and escalate higher if needed. This way, you can avoid having to claw back funds you’ve given to your employees unless absolutely necessary. 

Interested in perfecting your time and attendance management with mobile time clocks and digital timesheets? Contact us today to learn more.

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