What Is a Clawback Provision in a Severance Package Offer?

When an employee is let go, the employer may offer a severance package review. Sometimes, buried inside that offer is a clause called a clawback provision.

A clawback provision is a term that allows the employer to reduce, stop, or recover part of the severance payments if certain events happen after the employee signs the agreement. In employment law, clawbacks are most often connected to salary continuance.

In plain language, a clawback clause may say:

“We will continue paying you for a set period, but if you find new employment during that period, you must tell us. Your payments may stop, be reduced, or be converted into a smaller lump sum.”

For employees in Ontario, this can make a major difference. A severance package that looks generous at first may be worth much less if the clawback provision is triggered.

How Clawback Provisions Usually Work

A clawback clause in a severance package may require the employee to do one or more of the following:

1. Notify the employer if they find a new job

2. Notify the employer if they become self-employed

3. Repay money received after starting new work

4. Accept a reduced lump-sum payout instead of ongoing salary continuance

5. Stop receiving severance payments once replacement income begins

For example, an employer might offer 12 months of salary continuance. But the agreement may also state that if the employee finds a new job after four months, the remaining payments stop or are reduced.

This is why employees should not only ask, “How many months of severance am I being offered?” They should also ask, “Will I actually receive the full amount?”

For more context on payment structure, see Vanguard Law’s guide on lump sum vs. salary continuance in Ontario.

Salary Continuance vs. Lump-Sum Severance

Clawback provisions are more common when severance is paid through salary continuance rather than one lump-sum payment.

With salary continuance, the employer keeps paying the employee over time, often on regular payroll. Because the payments continue into the future, the employer may try to reserve the right to reduce them if the employee finds replacement work.

With a lump-sum payment, the employee typically receives the agreed amount upfront. A lump sum can offer more certainty, but it may also raise tax, benefits, and Employment Insurance questions.

The federal government notes that the way severance is paid may affect Employment Insurance benefits, so employees should consider both the legal and financial consequences before signing. Link to: Government of Canada – Understanding your severance pay.

Can an Employer Claw Back ESA Minimums?

Ontario’s Employment Standards Act, 2000 sets minimum rules for termination and severance. The Ontario government explains that termination notice/pay and statutory severance pay are separate obligations, and one cannot simply be used to offset the other.

Ontario’s official severance pay guide also states that eligible employees generally qualify for statutory severance if they have five or more years of service and the employer meets the payroll or mass termination threshold. The ESA severance maximum is 26 weeks. Link to: Ontario – Severance pay guide.

This matters because a clawback clause should be reviewed carefully to determine whether it improperly affects statutory minimums, common law entitlements, benefits, bonuses, commissions, vacation pay, or other compensation.

Why Employers Use Clawback Clauses

Employers often use clawback provisions because of the employee’s duty to mitigate.

In many wrongful dismissal cases, employees are expected to take reasonable steps to look for comparable work. If they earn replacement income during the common law notice period, the employer may argue that some of that income should reduce the damages owed.

However, this issue is more complicated than many employers suggest. Vanguard Law has also discussed this in its guide: Do I Need to Look for a Job After Being Wrongfully Dismissed in Ontario?.

A useful case to link for legal authority is Bowes v. Goss Power Products Ltd., 2012 ONCA 425, where the Ontario Court of Appeal dealt with mitigation and fixed termination entitlements.

The Risk for Employees

A clawback clause can create several risks.

You may not receive the full severance amount advertised.
An offer that appears to provide 12 or 18 months may actually provide much less if new work is found.

You may have reporting obligations.
The agreement may require you to notify your former employer immediately when you obtain new employment, contract work, or self-employment income.

You may face repayment demands.
If payments continue after you start new work, the employer may claim you were overpaid.

You may give up valuable rights too early.
Most severance agreements require employees to sign a release. Once signed, it may be difficult or impossible to pursue additional compensation.

The clause may be unclear or overly broad.
Some clawback language does not clearly explain what happens if the employee finds part-time work, contract work, lower-paying work, consulting income, or self-employment income.

Questions to Ask Before Signing a Severance Package With a Clawback

Before signing, ask:

• Does the clawback apply only to salary continuance, or to the entire severance package?

• Does it apply to part-time, contract, temporary, or self-employment income?

• Does it apply before or after ESA minimum entitlements are satisfied?

• Will benefits, bonuses, commissions, pension contributions, or RRSP contributions continue?

• Is there a lump-sum payout if I find new work?

• What exactly must I report to the employer?

• What happens if there is a dispute about whether my new work is “comparable”?

• Does the clause require repayment, or does it only stop future payments?

Employees should also review whether the package affects bonuses, commissions, stock options, RSUs, benefits, vacation pay, and Employment Insurance. Vanguard Law’s article on restricted share units after termination may be useful for employees with equity compensation.

Should You Accept a Severance Offer With a Clawback Provision?

Not necessarily. A clawback provision is not automatically improper, but it should be reviewed before you sign.

Depending on your circumstances, Vanguard Law may be able to help negotiate:

• A larger upfront lump sum

• A shorter clawback period

• A guaranteed minimum payment

• Better treatment of benefits and bonuses

• A clear 50% payout formula if you find new work

• Removal of repayment language

• Stronger protection for ESA minimum entitlements

The goal is to make sure the severance package reflects your actual legal entitlements — not just the employer’s preferred payment structure.

Speak With an Ontario Severance Lawyer Before You Sign

If your severance package contains a clawback provision, do not assume the offer is final or fair.

At Vanguard Law, our Ontario employment lawyers review severance packages, explain clawback language, and help employees understand whether they are being offered what they are legally owed.

Before signing a release, speak with Vanguard Law. A short legal review can help protect months of income.