New employees need to be trained. Some need to be moved. And, in many business sectors, employers continue to invest in their employees via continued education and training courses. All of these are investments. Their pay off, however, depends on whether the employee stays with the company.
Millennials job-hop like it’s their… well, job. Over 60% plan to leave their job within three years of being hired and with an estimated 10% going to work for direct competitors.[1] Their elders, moreover, are only slightly better; the days of working for decades at the same employer and retiring with a gold watch are ancient history.
Increased attrition creates increased cost to the employer. One study estimates 213% of the annual salary for jobs that require higher levels of education and specialized training.[2] This means that one employee earning $80,000 annually might cost the company between $40,000 and $170,400 in turnover cost.
Can any of the investments in employees be recovered and, if so, how?
Not all new-hire costs can be passed along to the departing employee. Company-specific orientation and training programs are merely sunk costs. But, with a valid repayment agreement, employers may seek the equitable repayment of certain costs from employees who depart before these investments pay dividends.
The details of reimbursable education programs vary slightly state to state. For example, in California, the training must be “voluntary” to the employee in order for it to be recoverable by the employer. Yet, repayment agreements are judicially enforceable throughout the US, even in jurisdictions such as California where restrictive covenants are routinely stricken down:
| California | Repayment of $30,000 of the fronted costs of a voluntarily undertaken educational program, the benefits of which transcend any specific employment and are readily transportable, is not a restraint on employment. USS-Posco Indus. v. Case, 244 Cal. App. 4th 197, 210 (2016). |
| Colorado | “Any covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled labor for any employer shall be void, but this subsection . . . shall not apply to: . . . Any contractual provision providing for recovery of the expense of educating and training an employee who has served an employer for a period of less than two years.” Colo. Rev. Stat. § 8-2-113 (2)(c). |
| Texas | “Work-or-pay” contracts whereby an employee must reimburse an employer for job training if he does not work for the employer after training is not against public policy. Nat’l Training Fund for Sheet Metal & Air Conditioning Indus. v. Maddux, 751 F. Supp. 120 (S.D. Tex. 1990). |
| Wisconsin | Agreement to repay costs does not restrict firefighters ability to work for a competitor and does not operate as a covenant not to compete because the obligation is unconditional, not based on whether the firefighter goes to work for a competitor. Heder v. City of Two Rivers, 295 F.3d 777 (7th Cir. 2002). |
Likewise, relocation and other incentives such as signing bonuses can also be tied to a requisite timeframe of employment post-benefit, with courts generally enforcing timeframes of 12-18 months:
| Michigan | Employee was required to reimburse his employer for certain relocation expenses in full under agreement promising to do so if he should he voluntarily terminate his employment within the first year. Kvaerner U.S., Inc. v. Minarik, No. 216550, 2001 WL 765895 (Ct. App. Mich. Jan. 26, 2001). |
| Nevada | Contract requiring repayment of relocation expenses to employer if employment terminated within one year for any reason is enforceable. Grimsley v. Charles River Laboratories, No. 3:08-cv-00482, 2011 WL 4527415 (D. Nev. Sept. 28, 2011), aff’d 467 Fed. Appx. 736 (9th Cir. Feb. 3, 2012). |
| New York | Under terms of the employer’s formal offer of employment, it was entitled to repayment of relocation expenses and a signing bonus from its product marketing manager who quit within the first year. Ebenstein v. Ericsson Internet Applications, Inc., 263 F.Supp.2d 636 (E.D.N.Y. 2003). |
| Ohio | An employee was required to repay the $7,600 relocation benefit provided to her, pursuant to a relocation agreement entered into between the employer and employee. Trout v. FirstEnergy Generation Corp., No. 3:07-cv-00673, 2008 WL 4159702 (N.D. Ohio Aug. 6, 2008). |
| Texas | Employee’s commitment to repay relocation costs if he quit within one year is enforced; this was not a restrictive covenant, did not affect the employee’s at-will status, and was not an unlawful penalty. Dresser-Rand Co. v. Bolick, No. 14-12-00192-CV, 2013 WL 3770950 (Tex. App. July 18, 2013). |
These authorities form the blueprints for successful recovery of employee investment costs.
- Timing. Enter into a clear and simple agreement with the employee before the investment is made, where the employee acknowledges the amount of the investment and agrees to repay it (or agrees to a formula for repayment, if the amount is difficult to determine) if he or she leaves within X years.
- Be exact. Tie the recoupment amount to a specific formula or to a set amount associated with the investment. For example, if the employer is attempting to recoup the cost of a $5,000 training, the employee may simply be required to pay the employer back $5,000 if he leaves within one month, and a decreasing percentage of the $5,000 if he leaves within two months, three months, and so on.
- Be reasonable. Over-reaching is invariably fatal. Brunner v. Hand Indus., Inc., 603 N.E.2d 157 (Ind. Ct. App. 1992) (“repayment agreement” invalid where employee could be liable for an amount in excess of all wages received); Wilson v. Clarke, 470 F.2d 1218, 1223 (1st Cir. 1972) (reimbursement agreement unenforceable where the employer could not demonstrate that the formula was a reasonable forecast of damages, where it did not adjust for time worked for the employer, or whether the termination was voluntary).
- Enforce diligently and consistently. Upon the employee’s termination, inform him or her of the amount owed and, if possible, obtain an the employee’s acknowledgement of the amounts owed and agreement to a repayment plan. Put a procedure in place so that this process is followed with all employees who terminate early.
- Be mindful of tax consequences. The employer must take any deduction it took for the reimbursement back into income when it recovers the amount from the employee. The tax issues associated with repayments are complex. Employers should consult their tax advisor to determine how to properly report reimbursements and repayments.
[1] http://millennialbranding.com/2013/cost-millennial-retention-study/
[2] https://www.americanprogress.org/wp-content/uploads/2012/11/CostofTurnover.pdf