What is a Relocation Repayment Agreement?
One of the many relocation benefits offered by large, multinational employers is the relocation repayment agreement ("RRA"). In general terms, an RRA is a legal document in which an employee agrees to repay a portion of his or her relocation expenses if he or she voluntarily leaves employment with the company prior to a certain pre-determined date, or within a certain number of years following the relocation. The amount an employee must repay is proportionate to how soon after the move the employee leaves employment.
RRAs are carved out of the pre-tax relocation benefit dollars an employer has allocated for the employee’s relocation. Companies typically offer RRAs for certain key positions or employees . RRAs are not universally used, but more and more companies are adding them to their relocation package. Companies typically do not include RRAs in their relocation programs for new hires.
The primary purpose of an RRA is to protect the company’s investment in the relocation of an employee and his or her family. RRAs ensure that an employee remains with the company long enough after the relocation for the company to achieve a return on its investment. This also provides reassurance to the employer that a candidate who accepted an employment offer and agreed to relocate will in fact make the move and remain with the company long enough for representative expenses to be recouped.
RRAs may provide additional protection, depending on their terms. For example:
The Essentials of a Relocation Repayment Agreement
A relocation agreement is a contract between an employer and employee that is used when an organization wants to relocate (or has relocated) one of its employees into a new role or business location, and the company paid for some or all of the expenses. The intent of the agreement is to pay for relocation-related costs when the employee agrees to work for the company for a certain period of time after an employee move. In the event the employee decides not to make that time commitment, the individual must reimburse the organization for its investment in them.
A typical agreement contains the following provisions:
Repayment Terms – the conditions under which the individual who received the relocation benefits must return them. For example, an employee may be required to pay back all expenses if they leave the company before 12 months, half of the expenses if they leave between 12 and 24 months, and a pro-rated amount after that.
Timeframe of Obligation – the period of time that the employee must fulfill to avoid paying back the relocation expenses. This timing will vary based on the benefits offered and other factors.
Conditions / Exceptions – there may be exceptions under certain circumstances. For example, if the employee is terminated without cause, or the job is relocated and the employee is not offered relocation expenses to the new location or benefits, they are not obligated to repay those costs.
Arbitration / Court – if there is no way to resolve the issue, the agreement will specify if either party is obligated to bring the matter to arbitration or before a judge.
Key Legal Points for Employers
Employers should be aware of the legal risks and issues that can arise when entering into a relocation repayment agreement. First, California law prohibits an employer from imposing a financial penalty on an employee. A relocation repayment agreement that requires repayment of all relocation costs if the employee voluntarily resigns before a certain date will be deemed a financial penalty under California law. Moreover, requiring that an employee repay some or even none of the relocation costs may still violate California’s prohibition against financial penalties. The prudent course is to consult with counsel when determining whether a relocation repayment agreement is appropriate, and how the agreements should be drafted.
Second, California law has a host of requirements regarding final paycheck and paystub requirements. As such, any time that a relocation repayment agreement may result in the employer withholding an employee’s final paycheck, absent the employee’s consent, or withholding certain information from a paystub (such as pursuant to Labor Code § 226(e)), these issues should be carefully considered and addressed with an attorney.
With these considerations in mind, and to avoid a financial penalty, an employer may: (i) offer a bonus to be repaid should the employee voluntarily resign under an agreed-upon time period; or (ii) the employer may willing to impute an amount to be repaid based on its actual costs attributable to the employee’s relocation.
Considerations for Employees
If an employee enters into a relocation repayment agreement, they have a positive obligation to notify their employer within 7 days of the change, including if they are unable to meet their obligations under the agreement as a result of the change. In doing so, the employee should also put forward any proposed variation to the terms of the relocation repayment agreement that reflects their individual new circumstances, such as a revised repayment time frame.
An employee can be required to reimburse the employer for the costs of their relocation as outlined in the increase to the repayment component under the relocation repayment agreement if:
a. the employee’s genuine employment has ended;
b. the employment is terminated for conduct reasons (other than for serious misconduct); or
c. the employment is terminated by the employer for operational or economic reasons (as opposed to personal reasons regarding the employee).
The default notice period for most employees is four weeks (this can be varied by agreement).
An employee who continues to provide their labour and services to the employer, but who is dishonest in this process, may be required to reimburse the employer as outlined under the increase to the repayment component under the relocation repayment agreement.
Where there is a dispute over the terms of the relocation repayment agreement and its application and whether there are any entitlements to reduce the repayment component or to keep some of the benefits received under the agreement, those entitlements will depend on the terms of the agreement, the applicable industrial instrument and applicable legislation.
The employee should make themselves aware of their rights and in the event of any questions or disputes they should refer to the agreement and seek advice from their representative.
Negotiating a Reasonable Agreement
Although negotiation may not always be necessary — you may be ecstatic over the opportunity and willing to pay back what it takes to comply with the process you just accepted to get the opportunity you always wanted — it’s worth asking if you can make the repayment terms less onerous on yourself. Alternatively, you might find the offer you have accepted has changed based on new information (such as a shift in project location) or a new opportunity has come up that makes the old contract untenable — in these cases, you will want to ask for an amendment . Let’s take a closer look at some step-by-step strategies you can draw on when asking a company to negotiate relocation repayment agreements.
It’s important to work with an attorney to fully understand and negotiate a relocation repayment agreement within your contract so that you are protected. Any attempt to negotiate on your own could seriously jeopardize your contract and result in an alteration to your job security.
Cases and Exceptions
While contingent upon express contractual terms, the timing and circumstances of any applicable repayment obligation will depend upon certain factors, including how long after the signing of the employment agreement the employee is terminated by either and which party fired first. An involuntary termination of the employee may include a wrongful termination or a voluntary termination of the employee for "good cause." Similarly, a voluntary termination of the employee may include a resignation by the employee. There is little authority on how these various post-termination events affect the enforceability of a repayment agreement and the validity of the underlying relocation assistance program.
A 2007 decision by the Pennsylvania Superior Court wrestled with the enforceability of a repayment agreement in the context of an involuntary termination by the employer. In Idziak v. McDonald’s Corp., 933 A.2d 806 (Pa. Super. 2007), the employee was fired less than one year into her employment as an operations consultant when she refused to move from Wisconsin to Illinois as directed by her employer. Relying on the relocation policy stated in her offer letter, that the employee "acknowledge[d] that should [she] resign from the Company or be involuntarily terminated . . . within 36 months of [her] actual start date, [she] agree[d] to pay McDonald’s $.05 for each dollar expended for [her] Relocation . . . [to] McDonald’s. . . .," Idziak sought enforcement of the repayment agreement. In response, the employee claimed that her employment was never made formal and that the repayment agreement was therefore invalid and unenforceable.
The court found that the employee was hired to work as an "Operations Consultant" in Northampton, Wisconsin and not as a manager for a McDonald’s franchise. The court also rejected the employee’s claim that the offer letter lacked consideration, instead looking to the other obligations agreed to by both parties in conjunction with the repayment agreement and finding that the employee’s employment was sufficient consideration. Applying contract law, the court reversed a lower court’s grant of summary judgment to the employee.
In a second decision, the U.S. District Court for the Eastern District of Pennsylvania faced the opposite situation faced by Idziak. After her hiring, the McDonald’s global staff decided to "downsize" the employee’s position. However, the employee resigned rather than accept a new position at a lower rate of pay and sued. If her agreement to repay was enforceable, the employee would have been liable for more than $20,000 in relocation expenses. Gonzalez v. McDonald’s Corp., No. 09-5003 (E.D. Pa. 2010), the court dismissed her claim for many reasons unrelated to the repayment agreement. However, the court did state that the employee’s failure to reduce her claims to writing or submit them to McDonald’s "may preclude the enforcement of them." In a footnote, the court added that "reimbursement was only due if . . . [the plaintiff] was terminated before three years of service."
Arguably the two most common exceptions, the bankruptcy of the employer and the involuntary termination of the employee without cause, are covered by statutes. The federal Bankruptcy Code liberalizes the general rule and provides for discharge from all debts in bankruptcy, including employment contracts such as relocation agreements that create a personal liability for the debtor. In the event of an individual bankruptcy, a petition filing will stop any action against the debtor for relief from a stay order. However, the exceptions to the prohibition of discharge may allow a creditor to recover.
It is less clear how an involuntary termination without cause impacts the enforceability of a repayment agreement containing a repayment obligation upon an involuntary termination.
Dispute Resolution
Disputes over a relocation repayment agreement may arise even if the parties are acting in good faith. For instance, a claim may arise when one party is not successful in a job offer and fails to give notice to the employer or the other employee does not agree with the calculation of the amount owed. If there is no resolution, the employer may be entitled to commence an action to recover the funds.
Even disputes over whether or not the agreement was ever entered into may be the subject of an action. For example, in Parc Foundation v Botanical Research Institute of Texas, Inc., the defendant employer failed to pay a former employee $180,000 relating to payment owed following termination of employment . The former employee was hired as President and Chief Executive Officer of the defendant and signed an employment agreement that included a provision for repayment of relocation expenses if he left the employment of the defendant within a specified period of time.
The former employee signed the employment agreement but disputed that he also entered into the relocation repayment agreement. The defendant, however, provided evidence that the former employee signed both Agreements and was paid the relocation costs. The court agreed with the defendant and ordered the former employee to repay the amount.
Legal action to recover funds should be considered as a last resort. For the size of the relocation amounts frequently involved in relocation repayment agreements, the litigation costs may outweigh the outcome. In all cases, a confidential mediation service, such as the American Arbitration Association, should be considered first to avoid litigation.