How to recoup relocation costs when a transferred employee jumps ship.
Five months ago, the executive’s company transferred him from its Chicago headquarters to a subsidiary in Seattle. Initially, he was eager to move and was excited about the long-awaited promotion. Before long, though, his enthusiasm for the new position began to wear off. He didn’t like the culture of the subsidiary and felt frustrated by its limited resources. However, he and his family like Seattle, so he landed another job there.
The company spent a lot on the executive’s move to Seattle, and it could have lost that investment. But it will recoup a portion of those outlays because, like a growing number of employers, it includes a payback clause in its relocation agreement.
Under a payback clause, a transferred employee agrees to reimburse the company all or part of the employer’s expenses for the transfer if the employee leaves the company within a specified time, typically within a year after the move.
Most payback agreements include a sliding-scale reduction in the amount that the employee must pay back, says attorney Jeffrey Arouh, a partner at Holland & Knight LLP in New York, whose practice includes corporate and employee relocation matters. Payback clauses generally cover the first year of relocation, sometimes the first 18 or 24 months, “but I’ve not seen anything longer than that,” he says.
At Exelon Corp., a national energy services company based in Chicago, an “expense repayment agreement” is executed when the employee agrees to relocate. It states that, if an employee leaves the company for any reason other than death, disability or discharge without cause within 12 months of a move, the employee will pay the company a prorated portion of all expenses the corporation paid—to the employee or on the employee’s behalf. Repayment can be made in installments.
Marriott International Inc. in Washington, D.C., has a “relocation agreement and statement of responsibility for incurred expenses,” says May Caffi, the company’s director of relocation services. A relocated employee who voluntarily leaves the company within the first year after a move must pay back a prorated portion of Marriott’s costs for the relocation.
Clauses on the Increase
Runzheimer International, a Rochester, Wis., consulting firm specializing in transportation and relocation costs, says companies are increasingly including payback clauses in relocation policies—“often as a result of having to extend considerable financial benefits to transferees moving into high-cost locations.” Moreover, the firm says, in the past two years it has become more common for companies to enforce the clauses.
According to Runzheimer’s Survey & Analysis of Employee Relocation Policies & Costs, 8th Edition, based on research done in 2001, “Organizations want to ensure that the ‘investment’ will not evaporate if the move fails within a short time frame.”
Says Arouh: “These agreements are being used more often in companies and in industries with high turnover rates”—those in which employees “have had no hesitancy about leaving positions for either more-challenging or higher-paying jobs.” Such industries, he says, include high-tech, science, aerospace and communications.
Not a Feature for Everyone
Some companies, however, choose not to include payback agreements, fearing they could backfire. Jim Schriner, who leads Deloitte & Touche’s Fantus Corporate Real Estate Solutions practice, based in New York, says the companies he works with are continually searching for ways to persuade employees to relocate, and they forgo payback provisions because they might be viewed as “disincentives.”
The question of whether a payback agreement might be a stumbling block for employees asked to relocate came up when Exelon considered the option two years ago, says Gary Snodgrass, senior vice president of human resources, but “we decided to implement the policy anyway.” Although it can be viewed as “an onerous provision,” he says, “we felt it was the appropriate thing to do.”
Snodgrass notes that relocation costs can be substantial. At Exelon, 275 moves were completed in 2001 for about $18 million. Although last year’s costs were higher than usual because of a merger between two companies—one in Chicago and one in Philadelphia—this year’s relocation costs nonetheless will be around $10 million, he says. “It’s real money, so we have to be very thoughtful about moving and relocating employees—both for the employee’s benefit and for the company.” Last year no Exelon transferees left the company during the 12 months covered by the payback clause.
Marriott’s Caffi says a payback agreement was in place when she joined the company 18 years ago. “I’ve never had any resistance from employees about signing the agreement or any feeling that it was unfair,” she says.
Weighing the Pros and Cons
Before instituting a payback agreement, take into account the ease or difficulty of recruiting and retaining qualified employees for your company and in your industry. The more challenging your recruitment efforts, the less likely you’ll opt for a payback clause.
“The use of payback agreements is very much a function of company culture,” says Arouh. “There are some company cultures that would view this as extremely inconsistent with the relationship that they have with their employees.” Such companies, he adds, typically are those that have had little turnover.
Each company has to decide for itself the value of a payback agreement, Snodgrass says. “They have to do what they think is right and proper within their organization to fit their culture, to fit their financial objectives and to fit their employee relocation objectives.”
If you decide you need a payback agreement, try to look at the terms of such agreements used by other companies, especially those in your industry. In addition, the Employee Relocation Council, a Washington, D.C.-based association of relocation specialists and service providers, has sample forms available to members.
Above all, relocation experts say, make sure any payback policy you adopt is communicated clearly to employees and that it’s applied and enforced with consistency.
Communication. Problems can be kept to a minimum, experts say, if the company informs employees from the start about its payback policies. Marriott’s employees receive such information via the company’s intranet, from the recruiter at the offer stage and in the offer letter. Moreover, employees being transferred are asked to sign the agreement.
Similar up-front communication takes place at Exelon, says Snodgrass. “We’re not twisting anybody’s arm, we’re not pulling the wool over their eyes, we’re not going after anybody after the fact. Everybody knows at the beginning of the ball game what the deal is.” His advice: “Be pre-emptive, be progressive, be proactive about communicating these kinds of issues, and you’ll have a better result.”
Application. It simply is not appropriate to apply the policy in some situations and not in others, says Arouh. “If the agreement is a standard company document and is used as a standard company document, which, for most companies, means that they will require the document to be signed before they will advance any relocation dollars, then it should be used consistently.”
Caffi, too, cites the importance of consistency in applying a payback policy, and she says that when the policy is being drawn up, those responsible for relocation should “work closely with the recruiting arm of the company as well as the legal department.” She adds that it’s important to take into account the payback process itself: Who will decide whether to collect the funds? How will that be communicated? Who will be responsible for the collection? How will this information be communicated to the payroll department so the appropriate payroll tax corrections can be made?
Having a well-defined process in place helps ensure consistency—and helps ensure that all the administrative bases are covered.
Enforcement. “From a practice standpoint, it is extremely important for companies that have these agreements to monitor them and to enforce them uniformly and consistently within the employee population,” says Arouh.
Marriott is no exception. Although enforcement issues have been minimal, the company has not hesitated to take action when necessary. Caffi says that in the past two decades, two people have been taken to court to collect the funds owed. The company’s legal department works closely with human resources and has developed a packet that outlines the steps to take to request repayment, starting with letters requesting the funds and culminating, when necessary, in legal action.
Limit the Pain
The goal, of course, is to avoid ever having to enforce the policy. Snodgrass says experience shows that “you can limit a lot of the pain, agony and potential mistakes about relocation issues that would otherwise occur if you go through a thoughtful process up front. ... Think through potential moves in advance and do them in a thoughtful and sophisticated way, engaging the employee in the process.”
Lin Grensing-Pophal, SPHR, is a Wisconsin-based business journalist with HR consulting experience in employee communication, training and management issues. She is the author of Human Resource Essentials: Your Guide to Starting and Running the HR Function (SHRM, 2002).