14 November 2022 / Andrew C. Voorhees

Employer-Provided Incentives From Terminated Employees: Building a Proper Reimbursement Policy Is Key

In today’s tight labor market, employers are offering more perks to recruit top candidates. Traditional incentives like higher salary, vacation, and hybrid work opportunities are prevalent. However, an increasing number of employers have been offering special incentives like tuition reimbursement, relocation expense reimbursement, and signing bonuses to attract and retain top talent. If your business offers these types of incentives, it’s important to develop a clear mechanism to recoup them if employment ends prematurely.  

Any incentive program to recruit or retain employees should be in writing and signed by all parties. As such, these provisions will be governed by the general principals of contract law. While the most basic components of an offer, acceptance, and consideration are needed, it is of the utmost importance that terms be clear and unambiguous, leaving nothing open to interpretation. A clearly defined incentive reimbursement provision will allow for more ease in collection and litigation. It will cut down the number of defenses raised by your ex-employee and leave the court little latitude to create its own solution.

Clearly defining terms and contingencies is very important in producing clear provisions to recoup employee incentives. For example, many incentive programs require a set period of service to retain the benefit. This can be anywhere from months to years of service with the employer to retain the benefit. But what does “service” mean in this context? Does service include time spent in training? Does it include any time period where the employee is on medical leave, or will that extend the time period? Also, such provisions should clearly define whether the employee can retain a portion of the benefit by reaching certain service benchmarks (whether an employee is entitled to a percentage of the benefit, even if terminated one day prior to the required service date). Even something as simple as a time period should be clearly defined to avoid any ambiguity.  

Another important part of any incentive reimbursement provision is how the employment ends. Many provisions allow for full reimbursement to the employer if an employee is terminated “for cause” within the clearly defined period of service. Termination for cause can cover a myriad of circumstances, including (but not limited to) insubordination, theft of company property, failure to complete training, violation of employer standards and policies, lack of production, excessive absence, etc. In fashioning the reimbursement policy, it is important to clearly define what constitutes termination for cause, including a list of clear circumstances and a catch-all provision for any company policy or procedure violation.

If your reimbursement policy is triggered by a termination for cause, it naturally follows that the employee would be able to retain the benefit it terminated “without cause”. In this situation, the employee would be terminated without any clearly defined reason, or possibly as a result of a reduction in force. This can also arise from an illegal termination, such as termination for discriminatory reasons in violation of Federal or State law. Another factor to consider is whether the termination for cause complied with an accompanying union contract if your employee is a member. Suppose your policy only allows for reimbursement when an employee is terminated for cause. In that case, the employee will most likely be able to retain the benefit if terminated without cause, even if the period of service has not been met.  

Another common way an employee leaves is by resignation. Typically, a reimbursement policy will allow the employer to recoup the benefit if the employee voluntarily terminates employment. However, an employee may claim the resignation was a result of a “constructive discharge." Generally, a constructive discharge is when an employee resigns because an employer made the work atmosphere so intolerable that the employee was compelled to resign. Once a claim for reimbursement is made after an employee resignation, constructive discharge is a possible defense utilized to avoid payment as it may be deemed to be a termination “without cause." While there is nothing to prevent an employee from raising this defense, it is important to fashion resignation policies so that it would lessen the effectiveness of such a defense if raised to avoid reimbursement.

Reimbursement policies should also include any provisions that foster ease in collection. These would include provisions allowing for interest rates on unpaid amounts and allowing recoupment of attorney fees if litigation is needed. It may also be prudent to include a venue provision governing where any litigation must occur. It would also be useful to include provisions governing the return of company property, such as ID cards, computers, vehicles, etc.  

Clearly, offering tuition reimbursement, signing bonuses, relocation expenses, etc., are an excellent way to recruit and retain employees in this economic environment. However, having a clear and unambiguous policy will provide protection of the recoupment of these benefits if the relationship does not go according to plan. 

If you have additional questions on this topic, please reach out to shareholder Andrew Voorhees at any time.

This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.

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