Applicability of Clawback Provisions in Turkish Labour Law

Definition

Clawbacks are contractual provisions that allow the employer to ask for a repayment of the money that has already been paid to the employee. Clawbacks can be seen as a type of compensation for employers, since the demand for repayment is triggered by an event.[1] These are special clauses that are put in employment contracts and are very commonly used in EU countries and the USA. Clawback provisions serve as a protection mechanism to ensure accountability and financial integrity within the firm.

The typical usage of clawback provisions in employment contracts is for the repayment of incentive-based payments, which are financial rewards paid to employees for their performance in the workplace. Employees usually need to meet or exceed a certain amount of performance. Incentive-based payments can be seen in different types such as bonuses, commissions, profit sharing, and career development opportunities.[2] With clawback provisions that are present in the employment contract, employers can demand the repayment of these incentive-based payments from the employee if the expected performance is not met or in the case of misconduct and resignation before the estimated time period.

General Application of Clawback Provisions

Three essential details should be included in the clawback provision if a full compensation is expected from the employee: the specific condition that is not met by the employee, the seniority of the employee that the provision will cover, and the time period that the clawback provision will cover. The enforceability of clawback provisions depends on the clarity of these requirements and compliance with the relevant law. The conditions and events that will trigger the clawback provision should be specifically written in the employment contract. Defining the triggering event is significant because it defines the scope and the amount of money the clawback provision can be enforced upon. The repayment amount can be predetermined in the employment contract or can be calculated according to the specific event that was stated in the contract. The amount can be determined regarding the severity of the triggering event, as long as the criteria for severity are clearly stated in the contract. The look-back period is also directly related to the amount that will be compensated.

The usage of clawback provisions in employment contracts has become very common in the USA since the financial crisis of 2008, since they allow employers, and therefore the firm, to recover from the incentive-based payments regarding the employee’s lack of performance or misconduct. Studies show that before 2008, around 3% of Fortune 100 companies were using clawback clauses; by 2010, this rate had jumped to 82%.[3] In USA law, if the conditions for the clawback are met, the duty of restitution is automatically born, contrary to Turkish law.[4] European countries’ regulation of clawback clauses varies from one country to another. In Spain, for instance, for a clawback provision to be enforceable, the employee’s direct consent is required.

In the UK, a clawback clause must be fair and based on a true pre-estimate of loss for firms that are not part of the financial services industry.[5] With several regulations and established case law, clawback provisions are commonly used in the USA; therefore, it makes a great example of how to establish clawback provisions within the law system. Even though clawback clauses are commonly used in countries like the USA, Turkey has no proper regulations in the area of labour law yet.

Clawback Provisions in Turkish Labour Law

Clawback provisions in contracts are only regulated in the Turkish Commercial Code in a limited manner for the board of directors of joint stock companies. Clawback for employment contracts is not regulated in the Turkish Labour Code (“TLC”). Therefore, the issue of whether clawback provisions can be put as a clause in employment contracts and then enforced on the employee continues to be a controversial subject in Turkish Labour Law.

The wage payment obligation is the basic obligation of the employer arising from the employment contract and taking place against the employee's obligation to perform work. Wage types are more than one and are defined in Article 32 of the Turkish Labour Code. In accordance with the principle of freedom of contract guaranteed under Article 19 of the Turkish Code of Obligations (“TCO”), individuals are free to determine the content of the contract unless expressly prohibited by law. Adding a clawback clause for the employee’s fundamental wage has limitations regulated in the TLC.

• Clawback of Basic Wage:

The obligation to pay this basic wage will arise after the employee fulfils their labour obligation. Therefore, regarding clawback clauses of basic wage, the employee will be entitled to payment of basic wage after the employee fulfils their employment obligation, and it does not seem possible for the employer to claim this payment back.[6] A claim for the return of the already-paid wage by the employee in return for the performance of labour may be made only if it results from a mistaken overpayment and the explicit consent of the employee in the case of education expenses.

• Clawback of Bonus Payment:

Another possibility that needs to be examined is the clawback clauses’ application to bonus payments. The bonus payment can be provided unilaterally by the employer. According to the jurisprudence of the Court of Cassation, if the bonus payment is promised to the employee within the fulfilment of certain conditions, the said bonus must be paid when these conditions are fulfilled[7]. Then the employee's right to demand the bonus will arise. However, since the bonus payment is aimed at increasing production and productivity at the workplace, if there is no production-oriented work, the bonus cannot be entitled. The Court of Cassation ruled that “Bonus is a practice to increase productivity in the workplace where production is made. It is understood from the file content that there has been no production at the workplace for many years. For these reasons, considering all the provisions of the collective employment contract regarding the bonus, the plaintiff’s bonus claims should be rejected,” and therefore the payment needs to be earned.[8]

In addition, the clauses stating that “the employee will not be entitled to bonus in case of resignation” are invalid according to the Court of Cassation. The Court of Cassation is of the opinion that it is not necessary for the employee to work until the bonus is paid in order to be entitled to the bonus. The employee who has not worked continuously until the date the bonus is to be paid will be entitled to the bonus in proportion to the amount they have worked and will be able to claim it.[9] However, clawbacks are dependent on a triggering condition, and as a rule, bonuses can depend on conditions as well. Therefore, even though there are no clear regulations about clawback clauses in the TLC, it is possible for employers to reclaim the already-paid bonus if the condition for the bonus is not met.

• Clawback as a Penal Clause:

Another possible analogy of clawback clauses in Turkish labour law can be penal clauses in employment contracts. There are no obstacles in adding penal clauses in employment contracts, even though it is not regulated in the TLC, according to the Court of Cassation’s jurisprudence. Penalty clauses are regulated under Article 179 of the TCO and accordingly: “If a penalty has been stipulated for the non-performance of a contract at all or not properly, the creditor may request the performance of either the debt or the penalty, unless otherwise understood from the contract.” According to the principle of freedom of contract regulated in the TCO, many conditions that are not obligatory or not included at all in the law may be included in the contract. However, since penal clauses are not regulated in the TLC, the principles that should be followed while adding penal clauses in employment contracts should be in line with the jurisprudence of the Court of Cassation’s pre-determined principles. The jurisprudence of the Court of Cassation sets the principles of the imposition of a penal clause in employment contracts as follows: The penalty clause must be mutual, equitable, and not contrary to the law, morality, and public order.[10]

Primarily, the penal clause must be mutual; a penal clause imposed only against the employee shall not be valid.[11] However, unilateral penalty clauses in favour of the employee are accepted by the Court of Cassation.[12] In terms of equity; although it is stated in Article 182 of the TCO that the parties may determine the amount of the penalty as they wish, paragraph 3 dictates that the excessive amount of the penalty is left to the discretion of the judge.[13] In order to demand a repayment of a pre-determined amount from the employee, the closest method to a clawback is adding a penal clause to the employment contract in Turkish labour law. However, the penal clause should be included in the initial employment contract; agreeing to a penal clause from a separate contract is controversial and therefore is not an effective way of using penal clauses.

In Turkish labour law, the penalty clause agreed is generally used to prevent the termination of the employment contract without a just cause for a certain period of time. However, the penalty clause cannot constitute an obstacle to termination in the presence of a just cause. If there is a just cause for termination, the employee may be exempt from paying the penalty clause by proving the existence of the just cause.[14] As a result, it is possible to determine a penal clause that targets incentive-based payments by determining the same amount as the pre-paid bonus, with the condition of complying with the principles that are determined by the Court of Cassation for penal clauses in employment contracts.

Conclusion

Clawback provisions play a significant role in ensuring financial accountability and integrity within organizations by allowing employers to recover incentive-based payments under certain conditions. While these provisions are widely used in countries like the USA and the EU, their application in Turkish labour law remains limited and controversial. In Turkey, clawback provisions are not explicitly regulated in the Labour Code and are only partially addressed in the Turkish Commercial Code, leading to ambiguity around their enforceability. Although there is some alignment with the concept of penal clauses in Turkish law, the legal framework requires further clarity and development to provide employers and employees with clear guidance on the use and limits of clawbacks. As global practices continue to evolve, a more defined legal stance on clawback provisions in Turkey could offer greater protection to both parties, ensuring fairness and transparency in employment contracts.

With thanks to Burak Bayrak and Songül Naz Toptaş for their contributions to this article.

References

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