Signing Bonuses Have Some Drawbacks

Allen Smith, J.D. By Allen Smith, J.D. March 7, 2022
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Money falling from the sky

​Signing bonuses may help attract talent but aren't without some traps for the unwary. Discrimination claims can arise with these bonuses, there can be morale issues among those who don't receive them, and employers that don't make the purposes of the bonuses clear can find that accompanying agreements are unenforceable.

Sectors offering a significant number of signing bonuses include trucking and health care, said AnnElizabeth Konkel, an economist with Indeed.com in Washington, D.C.

Signing bonuses are appealing to some employers because they are a one-time cost, she noted.

"Unlike raising the wage, an employer can choose to stop offering signing bonuses once certain positions are filled," Konkel said. "We are likely seeing an uptick in signing bonuses because some employers are struggling to find workers."

She added that if an employer is offering signing bonuses, general compensation and benefits should be competitive, too. "A hefty signing bonus might get a job seeker's initial attention, but if compensation and benefits are below the average for the sector, the appeal is lessened," she stated.

Traps

An employer that administers signing bonuses in a discriminatory manner—for example, by giving them only to male candidates or denying them to older workers—may face discrimination claims, noted Paul Starkman, an attorney with Clark Hill in Chicago.

Even if administered in a nondiscriminatory way, providing signing bonuses to some candidates but not all—such as when a company provides signing bonuses to external hires but not internal candidates, or for certain positions but not others—may give rise to morale issues, he added.

"When employers offer signing bonuses to some employees and not others, the employees who don't receive a signing bonus can feel unappreciated, undercompensated and shortchanged," said Jason Morris, an attorney with Newmeyer Dillion in Newport Beach, Calif.

"It is important to understand that employers are not permitted to discourage or prohibit employees from discussing their compensation with others," he said. "Therefore, instructing employees who receive a signing bonus to not discuss it with others is not a viable way to avoid negative feelings on behalf of the employees who don't receive a signing bonus."

Offering other incentives or forms of compensation to employees who don't receive a signing bonus is one option, he noted.

Legal risks also may arise for employers because signing bonuses typically have two purposes, Starkman said: recruiting talent to the organization and serving as legal "consideration"—the payment of something of value—for agreements that the organization wants new employees to enter into.

"These agreements can include noncompetition and nonsolicitation agreements, invention assignment provisions, and nondisclosure agreements," he said. "If receipt of the signing bonus is not expressly conditioned on the employee signing certain agreements, the employer may find that the agreements are not enforceable."

Paying Out Bonuses on a Schedule

"Employers should consider paying out signing bonuses on a schedule so that the final payment is not made until the employee has been employed for a certain period of time," said LaKeisha Caton, an attorney with Pryor Cashman in New York City.

She noted that signing bonuses may be subject to different tax withholdings than an employee's regular income, depending on how the bonuses are paid. If payment is deferred, the signing bonuses "may be subject to certain additional provisions of the Internal Revenue Code," she said. "Employers should consult with their accountant or a tax professional when making these payments to ensure compliance."

Difficulty Recovering Bonus if Employee Resigns Soon After Hire

If payment of the signing bonus on a schedule is not viable and it must be made upfront, employers should require employees to pay back some or all of their signing bonuses if they resign before a predetermined date, Caton said.

"Employers that adopt this approach must ensure that the manner in which they recoup some or all of the signing bonus is permissible," she said. In many jurisdictions, it is unlawful for employers to unilaterally deduct the amount of the signing bonus from an employee's paycheck in order to claw back the payment, she cautioned.

In other jurisdictions, documentation is key. In Illinois, for example, in order to obtain repayment of a signing bonus from a departing employee's final paycheck, the signing bonus may have to be characterized as a cash advance, Starkman said. That amount may be withheld from the employee's final compensation only if such arrangement was included in a written agreement signed when the cash advance was made.

"Be prepared for the possibility that the employee may refuse to return the signing bonus" after the employee leaves, Caton said.

The employer also risks future job applicants having a negative impression of the company if the employer were to file a lawsuit seeking to recover a signing bonus, said Mike Schmidt, an attorney with Cozen O'Connor in New York City.

Benefits of Signing Bonuses

That said, signing bonuses can help "induce a highly coveted candidate to leave their current employment or to choose your company rather than a competitor," Morris noted. "Signing bonuses can also signal financial strength."

Jennifer Garrard, vice president of human resources at Brother USA in Bridgewater, N.J., said, "The best use of signing bonuses is to help bridge a short-term gap between the candidate and employer. If someone is leaving a job with a different bonus structure, conflicting bonus payout dates, tuition reimbursement or other smaller compensation gaps, then a signing bonus is a great bridge."

"However, signing bonuses can be a waste of an employer's resources when employees receive such a bonus but do not perform as expected or do not remain at the company long enough for the employer to recoup its investment," Caton said.

"At the end of the day, signing bonuses are an employer cost, so if a business is struggling with its bottom line, it may not be possible to offer them," Konkel said.

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