Employee Repayment Agreements Explained
Employee Repayment Agreements Explained
Employee repayment agreements are a common practice for many organizations, especially for training programs and relocation expenses. These agreements help protect the employer in the unlikely event that relocating employees leave the organization after receiving relocation benefits – which can be considerable. It is crucial to carefully consider the terms of the agreement to ensure a fair and reasonable arrangement for both parties. In this piece, we will go over some key considerations and expenses to factor into an employee repayment agreement.
What Are Repayment Agreements?
Employee repayment agreements are contracts between an employer and an employee that lay out the minimal timeframe an organization expects an employee to remain employed with them during a relocation assignment, or after a permanent relocation. Repayment agreements are necessary when a company is relocating an employee to a new city or country for work.
If the employee decides to leave the company before the expiration of the time frame stated in the agreement, then they owe the company a portion of the relocation costs. In many scenarios, the repayment amount is the entire amount of the moving costs or an agreed-upon amount by the organization and the employee being relocated. The repayment amount may include storage fees, transportation, temporary housing, and household goods transportation, among other common benefits.
Many organizations use a graduated scale for the repayment amount, meaning that the costs to be repaid reduces over time. For example, if the employee stays halfway through an assignment, they may only need to pay a prorated repayment amount. Graduated scales can help incentivize employees to complete the assignment and reduce the financial burden on employees who need to leave early due to unforeseen circumstances. For permanent relocations, the repayment agreement generally covers from one to three years, with two years being the most common.
When drafting a repayment agreement, it’s critical to consider what specific costs will be factored in. Organizations should also consider how they will calculate the repayment amount, the length of the assignment, and other relevant factors. It’s also a good idea to consult with legal or HR experts to ensure the agreement is fair and compliant with applicable laws and regulations.
Why Is a Relocation Repayment Agreement Necessary?
Employee repayment agreements are important for businesses because they protect them if the employee being relocated decides to leave before completing the assignment.
Typically, employees being relocated by an organization are talented, skilled, and have other assets that are valuable to the company. Recruiters seek out and compete for employees with specialized skill sets and include relocation as part of their offers of employment. Repayment agreements inform the employee what costs they must repay should they leave their employer before the agreed-upon time.
Repayment agreements discourage employees from leaving before the specified date for two reasons: first, they don’t want to pay the relocation costs; and second, it gives competitors the challenge of paying for the amount themselves. However, the most important reason for having a repayment agreement is that the employer is covered if the employee decides to leave before completing the assignment.
The repayment can offset the employee relocation costs or cover other related expenses. Additionally, repayment agreements provide a clear understanding between the employee and the employer regarding expectations and obligations, reducing misunderstandings or disagreements between the two parties and fostering a better working relationship.
What Expenses Are Factored Into a Repayment Agreement?
When it comes to relocation or other employment-related expenses, an employer may offer a lump sum relocation package to assist the employee with costs incurred during the relocation process, , as well as a fully serviced relocation. The repayment agreement would then outline the terms and conditions of repayment.
Some common expenses that are factored into an employee repayment agreement or lump sum relocation package include:
- Training costs
- Relocation expenses, such as moving costs, temporary housing, and travel expenses
- Family assistance and childcare
- Interim health insurance
- Vehicle lease or purchase
- Visa and immigration expenses
- Advanced payment for professional licenses or certifications
- Temporary housing costs
- Transportation to the new location for the family
- Other travel expenses, such as meals
- Transportation of household goods, including vehicles
- Storage costs
- Any miscellaneous allowances or relocation bonuses
- Pet transportation
- Any other costs the employer has borne on behalf of the employee for the relocation
Employers also should include mention of any gross up contribution made as part of the repayment agreement, although depending on the timing of the employee leaving they may be able to be reversed if the departure is within the initial calendar year. Discuss approaches with your payroll team, should this scenario occur.
How to Collect on a Repayment Agreement
Collecting an employee repayment agreement can be challenging, even with an employee’s signature. In many scenarios, the employee may have left for a new position in a different location and changed their contact information without notifying their former employer. It can be challenging for internal departments to collect on repayment agreements; companies can exhaust all their options and expend a considerable number of hours in trying to collect the debt.
The better option is to hire a Relocation Management Company (RMC) with experience collecting repayment debt. RMCs have the resources to help companies collect on repayment agreement debts, including a collections department specializing in debt recovery. They have experience dealing with former employees who have defaulted on repayment agreements and can take the necessary steps to recover the money owed.
RMCs can also provide valuable services to help companies manage their relocation programs. They can help with the logistics of the move, arrange counseling services to help employees adjust to their new location, and oversee the repayment process from start to finish. By outsourcing the management of their relocation program to an RMC, companies can free up internal resources to focus on core business functions.
Other Repayment Agreement Considerations
Open communication with employees is essential to establishing the repayment agreement terms before and during the relocation process. Employers must clearly explain the agreement and specify the costs they will cover. Employees should understand their obligations and responsibilities under the agreement, including the consequences of not meeting them. Employers should also be available to answer any questions or concerns the employee may have and ensure they have all the information they need to make an informed decision.
Employers should ensure the repayment agreement is fair to the company and the employee. The contract terms should be reasonable and proportional to the costs incurred by the employer. Additionally, the agreement should not impose an undue burden on the employee, and the repayment terms should be feasible for the employee to meet. Employers should also consider the agreement’s potential impact on employee morale and retention and balance the company’s needs and the employee’s best interests.
Before finalizing a repayment agreement, we recommended having legal counsel review it to ensure it complies with all relevant laws and regulations. Employers should be aware of state or federal laws that may impact the terms of the agreement, such as wage garnishment restrictions or interest rate caps. Cross border relocations should consider the employment law of both the departure and destination countries. Legal review can help ensure the contract is enforceable and protects the company’s interests while being fair to the employee.
Creating a repayment agreement that works for the employer and employee is essential to ensure a fair and reasonable arrangement. Employers should consider the length of the contract, repayment terms, and expenses to factor in when creating the contract. By carefully considering these factors and working with employees to write up a mutually beneficial agreement, companies can ensure the successful repayment of funds while supporting the development and growth of their employees.
If you’re considering employee relocation, protect your organization with a well-crafted repayment agreement. CapRelo offers comprehensive services to help protect your investment and ensure a smooth transition for your new hires. We can handle everything from policy development to financial management and provide guidance every step of the way. Contact us today to learn more and request a consultation.