Employers cannot seek a repayment or “clawback” any part of a bonus unless there is specific wording the bonus’ written terms before the bonus is paid.

Often a performance bonus clawback can be triggered if there is an act of gross misconduct, which is a high threshold for the employer to establish. Alternatively, a sign-on bonus is an incentive payment to a new joiner which may be clawed back if, for example, the individual resigns within a short period after joining.

The UK financial services industry has been subject to a gamut of UK government and European initiatives since the 2007 financial crisis relating to overall remuneration, including bonuses (or “variable pay”) should be subject to malus and clawback in the event of a material downturn in the firm’s financial performance, a material failure of the firm’s risk management procedures or the staff member’s serious misbehaviour or error. In particular, the view is that clawback should be applied in cases of fraud or other conduct with intent or severe negligence which led to significant losses.

As well as being required within the Financial Services Industry, these types of clawback provisions are now common practice for c-suite and senior executives as a result of previous financial and corporate scandals.

Also under the UK Corporate Governance Code listed companies have additional duties. The Code details best practice in relation to senior executive pay, including recommending clawback clauses in specific circumstances.

For an employee, the clawback clause means that a bonus paid still may be at risk for extended periods. This can lead to uncertainty and even financial hardship, particularly if the bonus clawed back is triggered by something outside their direct knowledge, fault or control (such as downturn in the firm’s financial performance etc). It may be particularly harsh of it is clawed back many years and after the monies have been spent.

Not all bonus clawback clauses will succeed. The clawback contractual terms must be carefully drafted or an employee may argue that it is flawed, an unlawful penalty clause or, if the bonus clawback provisions are so punitive or disproportionate as to amount to an unreasonable restraint of trade for example if it prevents how or where the employee works (see Steel v Spencer Road LLP). The employee may also assert that the clawback steps taken are a fundamental breach of the written or implied employment contract so actionable unfair constructive dismissal and/or discrimination, depending on the circumstances.

Some employers may include clawback recovery arrangements into the employment contract, relevant plan rules and/or the terms of an individual’s incentive bonus award. This would include stipulating that the bonus is recoverable “as a debt” and that the individual gives an indemnity to cover the company’s legal costs if it needs to take enforcement action. Such a clawback clause can allow an employer to issue a statutory demand which, unless it is formally set aside by the court, the employee must repay the sums promptly or be bankrupted. It is vital that Senior Executives obtain advice on new documents before signing them as clauses with punitive financial consequences can be buried deep with a contract.