What Is a Clawback? | Contracts | MD&D #35

Evidence based insights into physician compensation, RVUs, contracts, healthcare economics, and personal finances. For residents, fellows, and early-career attendings.

Life and Finances, in Medicine.

Imagine you signed a contract and received a $30,000 signing bonus. It feels nice to get this kind of money, right? But then you leave the organization 10 months later, and then you discover that part, or sometimes all, of that money must be paid back. It doesn’t feel that nice anymore, right? That, is a clawback.

A clawback is basically a clause in your contract that lets your employer get back the money they previously paid you. It is usually attached to a commitment or certain conditions that you must meet. And this can apply to any money you received upfront from your employer. And this last sentence is important. Clawbacks are not only related bonuses. It may include money you received for relocation or loan repayment, in other words, any advanced money you received.

The commitments attached to this money vary a lot. They may include you staying in your current position for a certain period, or relocating to a certain area, meeting productivity thresholds, or fulfilling different of obligations in your contract. It may even include money you may received while in residency or fellowship. This is common in rural areas where recruiting can be difficult. To be able to compete in the market, certain organizations try to recruit young doctors but using incentives. Incentives like stipends that you get while you are in training, or more commonly student loan repayment.

The important point here is: Any money you received at the beginning of a job may not truly be yours yet.

In some cases, the payment has the form of a bonus. In others, it may have the form of a forgivable loan. The names may be different, but the premise is the same: What happens if you do not complete the obligation attached to that money?

Prorated vs. All-or-nothing clawbacks

A prorated clawback reduces the amount you owe as you complete more of your obligation. Let’s say, you get a $24,000 bonus tied to a 24-month commitment. If the amount is forgiven at $1,000 per month and you leave after 18 months, you may owe $6,000. An all-or-nothing clawback may require repayment of the entire amount, if you leave before fulfilling your commitment.

So, if the money is tied to a specific time frame in your position, leaving one day early could potentially create a very difficult scenario for you, depending on how the clawback provision was written. If you find yourself in the situation of negotiating a clawback, if possible, try to get a prorated forgiveness.

Gross vs. Net repayment

This is another detail that surprises a lot of people. Imagine you receive a $30,000 bonus. Taxes are withheld on that amount, so let’s say only $19,000 to $21,000 of those $30,000 make it to your bank account. If the contract says you must repay the gross amount, you owe the organization the full $30,000 not the net amount you received. 

Tax adjustments may help you correct part of the difference. It all depends on your tax bracket and when you pay the money back. If you pay back the same year you received the money, then it is much cleaner from the tax standpoint. But in the majority of cases this is not the case. From a cash-flow standpoint, nonetheless, this can still be painful. Always check if your repayment is based on the gross payment or the net amount you received.

Can interest be attached to a clawback?

Yes. By all means. This is especially important when the payment has the form of a loan, an advance, or a promissory note. In those cases, the contract may state that the unpaid balance accumulates interest. In this case it is important to know not only what the interest rate is, but when the interest begin accumulating. For example, if the interest starts from the original date, you received the money or only afterwards. It is also very important to know if the interest will apply to the remaining balance, like in a prorated clawback, or to the full amount. And more thing, you need to know if the interest is simple or compounded. Simple interest accumulates based on the amount you owe. Compounding interest accumulates based on the amount you owe plus the interest already accumulated. And last, you need to know if there are collection or legal fees. A $30,000 repayment can become very expensive if you add interest and other costs.

What is a promissory note?

I know this will sound very legal and I don’t mean to bore you with legal definitions, but it is important that you understand this part. Because this is the document describing your commitment to the money you received and any potential payback. So here it is: A promissory note is a legally binding agreement by which you promise to repay a specific amount of money to your employer by a certain date, if the amount is not forgiven. It is basically the legal document that enforces a clawback.

Just remember, the forgiveness and repayment terms may be written into the promissory note. But they can also be written in a separate agreement, like your contract. So, if your contract includes for example both, a bonus agreement and a promissory note, read both. The repayment terms may not appear entirely in the employment contract.

Examples of scenarios that may trigger a repayment:

What if you can’t fulfill your clawback obligations, due to no fault of your own?

A clawback should distinguish between circumstances within your control and circumstances that you can’t control. So, you may want to ask specifically for:

Many, if not all these situations may justify partial or complete waiver of the repayment. But they must be in the contract.

Retention bonuses and clawbacks

Retention bonuses are sometimes misunderstood. If an organization tells you: “We will pay you $25,000 if you stay another year,” that setting can become problematic if you get the money in advance. If you leave early, even the day before the deadline, your employer may demand repayment. When it comes to retention bonuses, I prefer to get the money at the end of the period I agreed to stay.

Relocation assistance

Relocation assistance is another one common attached to clawbacks. Your employer may pay for moving, travel expenses, temporary housing or even real estate (this last one is nice, right?). But the problem is the same as with any other such offer. These offers are usually attached to specific commitments. Be clear about what they involve.

Student loan repayment

I have seen these many times. Organizations offering tens of thousands of dollars toward student loans. These programs are nice. They usually help you get rid of a big financial burden by attaching the money to a certain number of years of service. Perhaps, I am biased because I have family member who used one of these to pay for their education. But just be cautious on the details of the program. The more generous the loan repayment program, the higher the stakes attached to it. Like any other transaction, always check the details.

Fellowship stipends and recruitment incentives

Many organizations, especially in rural areas and in the South, recruit doctors while they are still in training. Offers may include a monthly stipend during residency or fellowship, for example, in exchange for a commitment to join the organization after graduation.

Let’s assume, you receive $2,000 per month for 12 months during training. That is $24,000 before you even begin working as an attending. And if you later decide not to join that organization, you must pay the entire amount back. In some cases, with interests included. These arrangements can be very useful. But like any other commitment of this type, they reduce your flexibility. You are in fact making an employment decision before your training is even complete.

Clawbacks are not bad. I have received bonuses many times attached to provisions that I must meet. But I accepted these conditions after evaluating the offer in detail. It is reasonable for an employer to want to protection the money they gave you upfront, in exchange for your commitment. But the terms should be fair. So, before you focus on the amount you are getting, or even ask for more money, find out what happens if things don’t go according to plan. Because the most important number in the agreement is not be how much they give you. It’s how much they can ask you to give back.

The most important number in a contract agreement is not how much they give you. It’s how much they can ask you to give back.

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