Clawbacks of Bonuses and Commissions: Wage and Hour Considerations

by Practical Law Labor & Employment

A Practice Note that discusses wage and hour considerations for employers seeking to use clawback or forfeiture provisions for employee incentive compensation, such as bonuses and commissions. It explains that an employer's ability to recover previously paid compensation or require an employee to forfeit a future payment is an issue governed primarily by state law and that the central analysis often depends on whether and when the incentive payment is considered "earned wages." This Practice Note outlines the process for determining if a payment constitutes wages, referencing the important distinction between discretionary and non-discretionary bonuses. It also provides practical drafting guidance for employment agreements and incentive compensation plans to manage risk. Additionally, this Practice Note explores alternative payment structures, such as vesting schedules and forgivable loans. This Note does not cover equity compensation, plans governed by the Employee Retirement Income Security Act (ERISA), or clawbacks required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.