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This Wisdom of the Crowd, compiled from questions and responses posted on the Employment & Labor Law Forum,* addresses the consequences of employees providing signing bonuses with a claw back provision.
*(Permission was received from the ACC members quoted below prior to publishing their eGroup Comments in this Wisdom of the Crowd resource.)
 
Question:
Our company would like to provide signing bonuses with a claw back provision. I wanted to know if a claw back of a signing bonus is allowable under most states Wage Payment and Collection Laws. (We are in Virginia and South Carolina.) If not, do companies generally structure these as a loan that is forgiven over a number of years?
 
Wisdom of the Crowd
Response # 1: I am not commenting on the legality of the claw back provision (but I am not aware of anything prohibiting them). However, it is VERY difficult to actually claw back money. My preference is to structure the payment as a retention or performance bonus so it's not paid until the end of the applicable claw back period or attainment of certain goals. Offsetting it against the last paycheck is near impossible too.1

 

Response # 2: The Virginia Department Of Labor (VA DOL) is very picky about deductions from employee paychecks. Generally speaking, the VA DOL allows deductions provided there is a voluntary, written consent from the employee at the time of deduction. A blanket authorization for wage deductions, say at the start of employment, is not allowed as those are deemed forfeitures as a condition of employment. Of course, you need to make sure that any deductions don't drop the individual below the minimum wage or you have a problem under the Fair Labor Standards Act.
I agree with the earlier comment that it's difficult to get the money back and it's much better to just pay the bonus once it has been earned (e.g., the employee remains continuously employed with the company for one year).2

 

Response # 3: Most states won't let you 'claw back' a signing bonus by deducting from final wages owed. Repayment obligations are enforceable but you usually have to sue. Depending on the size, the cost of suit isn't justified unless you have an attorney's fees provision (not appetizing in offer letters) or it is within small claims jurisdiction. Forgivable loans are a better way to go for large sign on payments. More accounting headaches and you have to address tax gross up issues but a far more enforceable promise to pay.3

 

Response # 4: I would be cautious and do your research in the states you are thinking of instituting claw backs of signing bonuses. My company has attempted to claw back pre-paid sales commissions and in California the claw back is only legal when applied against another commission payment and NOT against regular pay, as that has already been earned by the employee. As a result of this, the claw back could only be utilized quarterly, which is when the sales commissions are paid out, and if an employee leaves the company prior to the full amount of the claw back the only option is to sue the former employee.4
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1Karen Mulroe, Senior Vice President & General Counsel, Zenith American Solutions, Florida (Employment & Labor Law, March 16, 2017).
2Tim Casula, In-House Counsel, LMO Advertising, Virginia (Employment & Labor Law, March 16, 2017).
3Anonymous Poster (March, 2017).
4Laura Norden, Senior Manager, Legal Contracts, Singapore Telecommunications Limited, California (Employment & Labor Law, March 15, 2017).
Region: United States
Interest Area: Employment and Labor
The information in any resource collected in this virtual library should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.
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