Our firm successfully resolved a retention bonus clawback dispute between an Irving fintech company and former executive. The dispute involved a $500,000 retention bonus advanced to a high-level key executive who then prematurely resigned. The retention bonus agreement was signed when the executive was promoted within a company and half of the retention bonus was paid while the executive was working for that company. As part of a business reorganization, the executive then transferred to an executive position in a newly formed affiliated company with the same core responsibilities.
A few months later, the executive requested an early disbursement of the second half of the retention bonus, which was paid by the newly formed company. Later, after he prematurely resigned, the company requested repayment of the second installment. The executive refused, asserting that the original agreement was with the first company which had gone through bankruptcy proceedings after the executive left.
The company hired Frisco business litigator John M. Frick of Reid, Dennis & Frick to recover the retention bonus. The case filed in Dallas County state district court settled five months after the lawsuit was filed.
What Is a Retention Bonus?
In an employment contract, a retention bonus is a targeted payment beyond an employee’s regular compensation that is offered as an incentive to keep a key employee on the job. It may be paid when a specific target date has been reached or in advance conditioned on the employee remaining until a future date has been reached. The bonus in employee contracts provides a financial incentive for the key employee to remain with the company, and discourages poor employee performance and employee misconduct.
What Does “Clawback” Mean?
Clawback, or claw back, is the recovery of money that has already been disbursed. In the context of a retention incentive, it is the recovery of the bonus money previously paid to an employee in advance when the employee leaves the company before the agreed future date. Sometimes in certain circumstances, the employee refuses to repay the money or has spent it, and the employer has to file a lawsuit seeking a judgment to recover the bonus.
Why Was the Bankruptcy Significant?
Even among an affiliated group of companies, each business organization is a separate and distinct legal entity. The executive was attempting to claim that the right to recover the money he received actually belonged to the first company named in the retention bonus agreement—not to the newly formed company that actually made the second payment. Because the first company had filed bankruptcy, the right to recover the money arguably passed to the bankruptcy trustee to exercise so that the money recovered could be paid to its creditors.
Executive retention bonuses draw scrutiny in bankruptcy proceedings, especially when they are made to high-level executives in the days leading up to a bankruptcy filing. Legislation proposed in 2021 would automatically allow bankruptcy trustees to claw back bonuses paid during the six-month period before a bankruptcy filing from any employee earning $250,000 or more. Until this legislation is passed, such transactions must be evaluated individually to determine if an executive breaches an agreement or if they constitute voidable transfers to defraud the entity’s creditors.
At Reid, Dennis & Frick, our business litigation and employment litigation recognize that each case is unique and different. Business disputes and employment disputes are often fact specific. While our litigators have likely handled similar cases before, we carefully analyze the facts of your particular situation to develop a strategy to favorably resolve your case as quickly and cost effectively as possible. In this case, our strategy included pre-suit negotiation, a pre-suit conference, filing suit in Dallas County, responding to a separate case filed by the executive, moving to consolidate the two, promptly providing disclosures and key documents to address the arguments of the executive’s legal counsel, and an early mediation.