A New 'Penalty' for Quitting

Companies might not be able to stop a worker from quitting to work for a rival. But more firms might consider making their soon-to-be former employees pay for the privilege.

Clawback provisions—clauses in employment contracts forcing an employee to return compensation to their employer—are getting renewed interest in compensation circles. The federal government likely will move to ban noncompete employment clauses later this year. For certain companies and roles, clawbacks could make a lot of sense. “They’re a lot more enforceable than many other alternatives,” says Anu Gupta, Korn Ferry senior client partner specializing in organization design.

Such a measure could backfire if it scares off highly talented workers, especially in sectors where labor shortages persist. Still, organizations might get support for clawbacks from their investors, says Sharon Egilinsky, a Korn Ferry senior client partner specializing in organizational strategy. “Some firms have been dinged for having overly generous exit-pay packages,” she says. Making clawbacks more routine and formulaic could satisfy stakeholders who want to see organizations get a better handle on costs.

Clawbacks for a firm’s top executives were legally blessed by the federal government in 2002. In 2009, the government allowed firms to recover bonuses and incentive-based compensation paid to CEOs and the next 20 highest-paid employees. By some accounts, clawbacks show up in one form or another in more than 80% of US employment contracts. Usually, those clawbacks are geared towards getting money back if earnings need to be restated,  or an employee commits misconduct or misses performance targets.

It’s not unheard of, however, to write these clauses so that they effectively prevent an employee from working elsewhere. Some companies require employees to give 120 days’ notice when quitting. If an employee wants to quit earlier, they have to pay a fee equivalent to the remainder of the four-month window. Other firms demand reimbursement for any training expenses if an employee quits before a certain date.

It might be less controversial to use clawbacks on bonus money, deferred compensation, or stock awards rather than money already paid out, especially with non-executive employees. “It’s an exchange relationship. If you want your bonus, you have to submit to these terms,” says Juan Pablo Gonzalez, sector leader for Korn Ferry’s Professional Services practice.

Experts say the key to using these types of provisions is transparency. During the job-negotiation process, companies should bring up clawbacks, “garden-leave” provisions, or other language that could keep an employee from immediately jumping to a competitor. Candidates should get used to talking about these types of provisions before they take a new role. That might not be easy for some people, especially those who aren’t working through recruiters. “You are saying you want the job, but at the same time you’re talking about having a prenup,” says David Vied, global sector leader for Korn Ferry’s Medical Devices and Diagnostics practice.

But by bringing up the subject early, candidates will know exactly what they are getting into with a job, and what they would have to do to get out of it. At the same time, these discussions establish that a clawback or quit notification can be bargained. “Clawbacks feel like negotiations, noncompetes feel like handcuffs,” Vied says.

For more information, get in touch with Korn Ferry’s Total Rewards business.

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