Why resigning after collecting a bonus may not be the smartest thing for an employee to do

A BIRD in hand is worth two in the bush, so the proverb goes. This may be true in most situations, but woe betide any employee who thinks their bonus is safe once the money has been deposited into their bank account.

In April 2023, a Singapore company sued a former employee for the return of a “variable incentive”, which was essentially a discretionary bonus. The company had declared a bonus, ostensibly because it had done well and its success was due, in part, to the employee’s contributions. After the bonus was announced but before it was paid, the employee tendered his resignation. The bonus was subsequently paid while the employee was serving out his notice period.

In court, the issue turned on whether the company had a right to claw back the bonus. The company’s case rested on a clause in the Employee Handbook, which stated that employees who received bonuses had to continue in service for a minimum length of time. If they resigned before the end of that period, the company could recover the full amount of the bonus paid out.

The employee countered by arguing that he was unaware of such a clause and that, in any event, the clause in the Employee Handbook was not binding on him as the terms of his employment were strictly confined to the clauses in the employment contract.

Unfortunately for the employee, the court did not accept these arguments. His purported ignorance of the Employee Handbook was not consistent with the facts. In particular, the company’s HR representative had referred to the Employee Handbook when explaining the terms of the employee’s employment to him. The company had also sent an email blast to inform all of its employees that the Employee Handbook had been updated and the latest version was available on a public drive.

On the question of whether the terms of the Employee Handbook were binding on the employee, this was resolved by reference to the employment contract itself, which stated clearly and unambiguously that the employee was bound by “such further terms as set out in the Employee Handbook”. For these reasons, the company was entitled to claw back the variable incentive from the employee.

What are clawbacks?

In the employment context, clawbacks are a mechanism by which employers may recover money previously paid to employees if certain events, also known as conditions subsequent, are triggered. Common examples include the present situation, where an employee resigns shortly after receiving a bonus, or where an employee is deemed a bad leaver because of some misconduct uncovered by the company.

To be clear, clawbacks are not illegal unless they seek to penalise the employee. They are also not new. Clawbacks have long been used by employers as a way to safeguard their interests.

For example, employees are generally considered to be valuable assets of the company. These individuals are responsible for driving innovation, productivity and value creation. A top performer ought to be remunerated generously or there may be a risk of them leaving for greener pastures. By linking incentive payments to an employee’s continued employment, this helps to protect a company’s investment in its employees by encouraging the retention of talent. In turn, this helps to promote a stable workforce.

Clawbacks also serve a useful purpose in deterring unethical behaviour as they often target employees where it hurts the most – their financial well-being. By clawing back previously paid remuneration, particularly where such remuneration was derived from deceit or some other fraudulent or unethical action, a clawback provision imposes a direct and tangible consequence for such misconduct. Psychologically, the fear (or threat) of losing a significant portion of one’s earnings is likely to discourage employees from engaging in such behaviour.

The legal position on the clawback of payments

In the present case, the company was able to take the employee’s bonus back because the employment contract said it could.

It is also important to note that the bonus is a purely discretionary payment. In other words, the employee had no contractual right to receive any payment. It would have been perfectly legal for the company to have kept all of its profits to itself. Insofar as the company was willing to share a windfall with its employees, it could dictate the terms that would govern the payment (which, it must be emphasised, the employee agreed to).

The company was fortunate enough to have been able to rely on a contractual clause to enable it to claw back the payment from the employee. This is, however, not always the case.

In my experience, it is unfortunately more common to encounter the situation where an employer has declared a discretionary bonus payment but later tries to abandon that promise to pay (for example because of changing market conditions). Putting aside the potential reputational damage a company may suffer from doing this, any attempt to walk back from the promise could be problematic if it can be shown that the promise has crystallised into a legally-enforceable right or a separate contract between the parties.

Besides the clawback of bonus payments, there could be other situations where an employer may attempt to effect clawbacks, for example from an employee’s salary.

Generally speaking, employers should conduct such clawbacks sparingly as an employee’s salary represents their livelihood and financial stability. It serves as the primary source of their income for meeting daily needs, supporting their family and planning for the future. Clawbacks from salary can therefore significantly impact an employee’s financial well-being by potentially impeding their ability to meet their financial obligations.

In fact, the Employment Act 1968 makes clear that only authorised deductions can be made from an employee’s salary, and even then, up to a prescribed limit. These include:

• deductions for absences from work;
• deductions for damage to or loss of goods (or money) entrusted to the employee;
• deductions for accommodation supplied by the employer;
• deductions for the recovery of any advance, loan or unearned employment benefit or any overpayment of salary;
• deductions made with the employee’s written consent; and
• deductions for statutory contributions such as CPF.

The bottom line

“Collect your bonus first then resign! That way you can pocket the money and go!” How many times have we heard well-meaning employees parrot these ruinous lines to their disenfranchised co-workers?

If this case has shown us anything, it is that employers may yet have the last laugh when it comes to opportunistic employees looking for one last windfall payout before shuffling off to their next gig.

If you find yourself in this position at any point, you should, at the very least, familiarise yourself with the terms of your employment contract, as well as any ancillary policies or handbooks that may contain substantive terms. Remember, the employee in this case was ultimately undone because the relevant clawback provisions were built into his company’s Employee Handbook, which, in turn, had been incorporated into the employment contract by reference.

And if there is a compelling reason for you to jump ship to a new employer very soon after a bonus has been paid (for example because the new manager is actively hiring, there is only a small window of opportunity, and the role is your dream job), you may have to be prepared to forgo the payment.

In the grand scheme of things, losing out on a bonus may be water off a duck’s back in light of one’s long-term career prospects. Who knows, the new employer may even be willing to make good that loss in the form of a sign-on bonus if you asked nicely.

Clarence Ding is a partner and the head of the Singapore employment practice at international law firm Simmons & Simmons. This commentary reflects his personal views and is not intended to constitute legal advice