Salary & compensation · Updated October 2026
A clawback clause is a term in an employment contract or incentive plan that lets the employer recover pay it has already paid or vested, typically a bonus, commission or equity, when a defined trigger occurs such as fraud, misconduct or a restatement of results. It usually sits alongside a malus clause in the variable pay scheme.
| Point | Malus | Clawback |
|---|---|---|
| Acts on | Unvested or deferred pay | Pay already received or vested |
| Mechanism | Employer simply does not release it | Employee has to return money |
| Practical difficulty | Low, the money is still with the company | High, often needs a demand notice or a civil claim |
This is why regulators pair the two with deferred compensation: holding money back makes malus easy and reduces the need to chase a clawback.
For everyone else the clause is purely contractual, so it should spell out the triggers, the look-back period, the amount (gross or net of tax) and how repayment happens.
Not safely. Section 18 of the Code on Wages, 2019 lists the deductions allowed from wages and caps them at 50 percent, and a bonus clawback is not clearly one of them. Most employers ask for repayment directly or set it off against exit dues in the full and final settlement, which itself can be disputed.
Courts look at whether the clause is a genuine recovery of pay linked to a proven trigger, or a penalty in disguise. A clause tied to established misconduct, after a proper domestic enquiry, stands on firmer ground than one tied to a vague “loss of confidence”.
There is no specific provision in either Income-tax Act for this, and the treatment is unsettled. Many clauses therefore recover only the net amount the employee actually received; agree this with your tax adviser.
Clawbacks most often follow a misconduct finding, so see our guide to the misconduct, termination and domestic inquiry process for the steps that come first.