Understanding and enforcing clawback clauses in employee compensation: Ensuring employers know when it’s okay to take back what’s rightfully theirs

August 14, 2025

George Yang

Disclaimer: The information in this article is provided for general informational purposes only and does not constitute legal, financial or professional advice. Readers are encouraged to consult with qualified legal or employment law professionals to obtain advice tailored to their specific circumstances.

Most of us are taught at a very young age that once you give someone something, you can’t just take it back. But, in the working world, this isn’t always true. In fact, a clawback clause exists for this very reason: to recover compensation from employees when it’s required. Although clawback enforcement can look different depending on the scenario, every human capital management (HCM) professional, especially those supporting payroll and human resources functions, needs to understand the basics of how to implement a clawback clause, regardless of whether it amounts to a few dollars or a few thousand.

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What is a clawback clause?

A clawback clause is a provision in an employment agreement or similar document that enables employers to recover compensation from their employees, typically in circumstances where the employee was overpaid or awarded compensation without meeting specific conditions. While this broad definition is helpful for understanding the basic concept, it’s only when you dig into specific examples that you can understand the wide range of scenarios that you might encounter, each with its own level of complexity and nuance.

What do the general components of a clawback clause look like?

As a starting point, employers should understand that these clauses are meant to be used as a tool for employers to protect themselves across a variety of scenarios where their employees may be incorrectly compensated and those funds need to be recovered. Without a clawback clause or another legally enforceable written agreement in place, it may be difficult for an employer to reclaim these funds, regardless of the circumstances.

In general, clawback clauses should be developed with the following in mind.

Clearly state any and all triggering events: Always be specific when describing the exact situation in which a clawback will take effect (e.g., misconduct, financial restatements, resignation within a certain period, overpayment).

Clarify the types of compensation impacted: Identify what type of compensation can be recovered if a triggering event occurs (e.g., bonuses, commissions, salary, reimbursements).

Outline the method(s) of recovery: Outline the different ways that funds may be recovered (e.g., repayment, deductions).

Define the time period: State the time period in which a clawback is enforceable, including in circumstances where the employee may have already left the company.
Align with relevant employment laws: Ensure that the clause aligns with all provincial and federal employment laws. For example, in many provinces, payroll deductions can only occur with written consent from the employee.
Confirm employee understanding and consent: Given what could be at stake, ensure that clawback clauses are clearly stated and understood by impacted employees prior to their formal agreement and sign off.

” Most of us are taught at a very young age that once you give someone something, you can’t just take it back. But, in the working world, this isn’t always true. In fact, a clawback clause exists for this very reason. ”

Getting started: Understanding common examples

Some instances of enforcing clawback clauses may have higher stakes, involving multiple employees and large amounts of money, while others are more common in the day-to-day operations of companies and can be more straightforward to identify and correct with the right business practices in place.

Greg Bush, Partner at Miller Thomson with expertise in labour and employment, outlines a few examples of clawbacks or payroll adjustments that are more commonly encountered when managing your workforce.

Deducting overused vacation: Employees often accrue vacation over the course of a year and for practical reasons, many employers allow employees to take time off before they have accrued enough vacation. If the employee resigns or is terminated during the year after having taken more vacation than they’ve earned, the employer may be able to deduct this overused vacation pay from the employee’s final wages.

Relocation or other similar expenses: Employers may try to incentivize employees to join their company by offering relocation assistance or covering the costs of other expenses. To help mitigate the risk of an employee taking advantage of such an offer and then leaving the company, the employer may require that the employee pay back any amounts paid by the company if they leave or are terminated within a certain period of time after starting.

Accidental overpayments: When an employer makes an accidental overpayment to an employee, they may be able to unilaterally deduct the overpaid amount directly from the employee’s pay. The general idea is that because an overpayment is not technically wages, since it was not earned by the employee, the employee is not entitled to keep it.

Mitigation clawbacks: As part of an employee’s separation package, the parties may agree that the employee will receive salary continuation for a period of time following termination. To help offset the employer’s obligations, the parties may negotiate a mitigation clawback that kicks in if the employee finds new employment during the salary continuation period. Such clauses typically provide that the salary continuation payments will stop entirely or that the employer will pay out a lump sum amount representing a percentage of the remaining payments once the employee finds new employment.

Bonuses, commissions and executive compensation clawbacks

Once you move beyond the more common day-to-day examples, additional clawbacks may be connected to bonuses, commissions and incentives offered to senior staff and executives.

Bonuses: Signing and performance-based/year-end bonuses could be recovered for a variety of reasons including an employee leaving their position, voluntarily or through termination, before a mandatory period of time has passed (e.g., signing bonus) or based on financial misstatements or sales target misrepresentation (e.g., performance-based/year-end).

Commission-based: Commissions could be recovered in the event that a sale is reversed or refunded at a later date.
Executive compensation: Executive compensation, such as annual performance bonuses, stock options or even salary, may be recovered in the event of employee misconduct, regulatory violations, violations of the employment agreement (e.g., confidentiality clause, non-compete clause) or termination with cause.

What happens if an employee cannot pay?

Depending on the nature of the clawback and when it was discovered, it is plausible that by the time an employer looks to enforce a specific clause, an employee might be unable or unwilling to return the funds. If this occurs, employers are left with a number of different options, which may include:

Negotiating directly with the employee;

Implementing voluntary wage deductions;

Partially or fully forgiving the amount owed; and

Taking legal action.

The path pursued by the employer will vary depending on situational factors such as the relationship with the employee, the amount owed, the likelihood repayment will be received, whether legal action is worth the time and resources and what precedent may be set for future dealings with employees.

While recovering compensation can be an uncomfortable task, clawback clauses represent a critical protection for employers. At their best, clearly designed and communicated clawback clauses allow employers to manage different scenarios, whether minor or more contentious, in a consistent and timely manner while minimizing the impact to impacted employees.

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