“Clawback clauses” state that an employee must refund all or part of his or her variable bonus if it transpires that it should not have been paid out in the first place. An example might be an employee who lands a lucrative contract and is paid a bonus for doing so, only for the customer then to go bust so that the employer loses the turnover from that contract. A clawback clause can ensure that the employee has to pay back the bonus.
There are statutory rules governing clawback clauses in certain cases. Employers and employees are free to agree to clawback arrangements, for instance in a bonus agreement.
First of all, the law sets out a clawback provision for directors under a company’s articles of association; the company can reclaim a bonus, or part of it, if the director gives incorrect information about the achievement of targets underlying the bonus or the other circumstances on which the bonus depended.
Also, the Dutch Financial Supervision Act (Wet op het financieel toezicht) specifies that a financial business must reclaim variable remuneration from a natural person if that person’s conduct has had a significantly adverse impact on the business.
There are clawback provisions in the Dutch Standardisation of Top Incomes Act (Wet normering topinkomens), which states that top company officials have to repay to the company any remuneration and severance payments above the set statutory maximum, as these are then deemed not to have been due in the first place.
Contractual clawbacks had a part to play in three recent court rulings.
In a case before the Court of Appeal for Arnhem-Leeuwarden (click here, in Dutch only), an employee had been guilty of a conflict of interests and other financial misconduct. The employee had received a bonus of EUR 80,000 for a customer transaction in 2013, though this same transaction later led to a loss of EUR 5.5 million. The employer accordingly wanted half of the bonus to be repaid. While the Court of Appeal understood that the employer did not feel that a full bonus was reasonable after a loss running into millions, it also held that the employer ought to have told the employee adequately and in good time about the complete terms of the bonus. The employee was also entitled to a gross bonus of EUR 120,000 for 2019, because the clawback clause – stating that the employee was only entitled to the bonus if the “administrative rules” were met – was not sufficiently clear.
The Subdistrict Court in Almere made a finding on a clawback clause that stated there was no right to a bonus if the director under the articles of association was no longer “actively employed” (click here, in Dutch only). Following a reorganisation that involved the director being placed on gardening leave from June 2020 and then being dismissed from 1 April 2021, he claimed ongoing payment of his bonus until the end of his employment. The Subdistrict Court found that the company bore the risk for placing the director on gardening leave, so that he was still entitled to his bonus.
The Subdistrict Court in Amsterdam issued a ruling in a case of a fraud running into millions that happened under the responsibility of a particular employee (click here, in Dutch only). This employee received a variable bonus every year and the employer refused to pay it once the fraud came to light. As the variable bonus had not been subject to any particular conditions, the employee retained his right to that variable bonus, according to the Subdistrict Court.
Clawback clauses do not always yield the result that the employer might want. Even fraudulent employees can retain their rights to bonuses. The thing is that it has to be spelled out clearly enough to an employee whether and when he may have to refund a bonus. Also, the employer must not have exclusive rights to trigger the clawback. A clawback clause can be valuable if these conditions are satisfied. However, if there is no agreed clawback clause or if the clawback clause does not meet the legal requirements outlined above, an employer still has further options for reclaiming the bonus. If there has been a fraud, for instance, it could be argued that the bonus should be repaid on the basis of error. The error argument was however overlooked by the employers in the cases we just mentioned, before the Court of Appeal for Arnhem-Leeuwarden and the Subdistrict Court for Amsterdam.