Relocations are expensive, and companies want to be sure they will have the return on investment with the new hire or transfer. In order to protect themselves, it is a common practice for companies to include a provision in their policies that an employee will have to repay all or some of the expenses incurred on their behalf should the employee resign or be terminated for cause within a specific period of time.
A Repayment Agreement communicates to the relocating employee that in consideration of the employer’s payment of relocation expenses, the employee agrees to repay all such expenses unless the employee continues to work for the employer for the specific time period outlined in the agreement. There is no intention to create a debtor/creditor relationship and there is no fixed obligation to repay. The obligation is to repay the relocation costs is contingent or unknown at the time of receipt. No promissory is executed nor is any interest due from the employee.
REPAYMENT AGREEMENT – BEST PRACTICES
There must be a written agreement that the employee signs BEFORE employment begins, or prior to his or her transfer. It is important to get this agreement signed before engaging relocation services.
The agreements should be simple and clear. The employee should acknowledge the repayment formula and time frame. Agreements are considered a legally enforceable contract. The trigger event is if the employee voluntarily resigns or retires from employment or the company terminates employee for cause.
Repayment calculations and demand letters should include the cost description and amounts such as:
- Household Goods Shipments and Storage
- Vehicle Shipments
- Travel – House Hunting and Final Move
- Home Sale and Home Purchase Closing Costs
- Rental Assistance
- Tax Assistance Provided (Gross-up)
Many employers require 100% if the employee terminates within the first 12 months. Other employers use a sliding scale reduction in the amount of the payback. Two examples of how a prorate based upon the length of service as follows:
- 100% if the employee leaves in less than 6 months
- 75% if the employee leaves between 6 months and 12 months
- 50% if the employee leaves between 12 months and 18 months
- 25% if the employee leaves between 18 months and 24 months
- 100% if employee leaves in less than 12 months from date of hire/transfer
- 50% if employee leaves between 12 months to 24 months from date of hire/transfer
Repayment agreements should be consistently enforced with all employees. Forgiveness is a taxable event.
Repayment agreements should include the right to recover language and authorize the Company to the extent permitted by law to recover all or part of the relocation costs by either deduction in salary or monies due upon termination or by other available remedies, including the costs associated with recovery such as reasonable attorney fees.
Agreements should include an Entirety Clause. This way there can be no claims as to prior or subsequent oral modifications or promises. Agreements should include at-will employment language.
Statute of limitation is based on the date of the termination since that is the day the written agreement becomes a debt. Repayment agreements can be pursued for years after the employee terminates based upon the laws within that state. The number of years range from 2 to 15 years; the majority is 6 years’ statute of limitations.
Companies should consult tax advisors to understand the impact of repayment agreements – such as:
- What are the tax consequences if the employer forgives the repayment?
- Do the periodic reductions in the potential liability have tax consequences?
- What are the tax implications if the new employer repays company on behalf of the employee?
By: Ginger Merrick, SCRP, SGMS
Senior Global Mobility Consultant
If you would like to learn more about Relocation Agreements as a part of Relocation Management Services, contact InterLink Relocation Resources toll-free at 1-866-254-3910 or email email@example.com.
© 2020 InterLink Relocation Resources. All Rights Reserved.