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The Pros and Cons of Recruitment Signing Bonuses

by | Nov 6, 2023 | Firm News

Written by Robert Siderius, Jr and Peter Schoening | Nov 6, 2023 |

How can employers effectively recruit new talent and simultaneously maintain a financially secure position? Employers sometimes offer signing bonuses as an incentive to job applicants. Signing bonuses can help in recruitment, but there are some potential pitfalls that employers should consider. Following is a discussion of some of the issues that can arise with signing bonuses. We also explore the differences between signing bonuses and offers to reimburse prospective employees for “expenses” associated with relocating to a new job. In doing so we address the Washington Wage Rebate Act, RCW 49.52.050(1)-(2) (“WRA”) and how that might impact consideration of signing bonuses or relocation reimbursements offered at the outset of the employment relationship.

Signing bonuses have been a common method of recruiting employees in a tight job market. Signing bonuses have become far more prevalent recently with the difficulty employers face in finding qualified candidates for vacant positions, especially for skilled positions. But what happens when a new hire, who has been paid a signing bonus, leaves your employment shortly after being hired? Employers oftentimes include with the signing bonus a “clawback” provision, requiring that an employee repay all or part of the signing bonus. However, these types of provisions probably run afoul of the WRA.

The WRA expressly prohibits employers from collecting rebates of any part of wages or willfully depriving employees of wages. However, the WRA does not define “wage.” In a related statute, the Minimum Wage Act, “wage” is defined as “compensation due to an employee by reason of employment.” RCW 49.46.010(7). If employees’ bonuses are considered part of their wages, employers are probably required to pay the bonus, and employees may have no obligation to repay a bonus, even if the bonus is contingent on an event that does not occur (i.e., maintaining employment for a period of time).

As a result, if an employer fails to pay out “wages” owed to an employee, or requires wages (signing bonuses) to be repaid, the employee is likely able to recover not just the wage or bonus, but double damages and attorneys’ fees and costs. RCW 49.52.070.

In 2014, the Supreme Court of Washington considered whether a signing bonus was due to an employee under the terms of an employment contract and determined that it was a “wage” because it was paid for his work performance. LaCoursiere v. Camwest Dev., Inc., 181 Wash. 2d 734, 743, 339 P.3d 963, 967 (2014). The Court discussed a 2005 case decided by Division 3 of the Court of Appeals of Washington and noted that an employer owed a signing bonus to its employee under his employment agreement because it was “in exchange for the employment.” Id. In that case, the employee agreed to pay back “expenses” if he left the company within one year. Flower v. T.R.A. Indus., Inc., 127 Wash. App. 13, 34, 111 P.3d 1192, 1202 (2005). However, the Court determined that the employee’s signing bonus, which represented $10,000 of the employee’s $20,000 “moving allowance,” was not an “expense” that required repayment. Id. In other words, the employer was entitled to recoup only the $8,200 that the employee spent on moving expenses and not the $10,000 signing bonus, despite the parties’ agreement and the employee’s departure from the company. Importantly, an employer may only recover expenses that an employee actually spent, rather than the entire amount that the employer agreed to cover.

Given the Court’s interpretation of “wages,” it is crucial for employers to consider how to classify recruitment payments at the inception of an employment relationship. A contractual provision designed to claw back a signing bonus when an employee does not maintain employment for a set amount of time is probably unenforceable, and efforts to enforce that may result in a wage claim that would include double damages plus payment of the employee’s attorneys’ fees and costs.

If employers want to have some form of clawback provision, the better practice is to offer to compensate new or prospective employees for their “moving expenses,” rather than provide such employees with a “signing bonus,” which has been interpreted to be part of “wages” and earned upon commencement of employment.

As an alternative to providing a signing bonus in an upfront lump sum or presenting an incentive through a “moving expense,” employers may choose to pay out a bonus to employees over a period of time to strike a balance between incentivizing employment, ensuring continuity of employment, and preserving capital. Similarly, employers may consider offering a bonus to employees at the end of a specified period of time. These types of bonuses, while still counting as wages, provide employers with greater security over funds allocated for hiring.

Some disadvantages of paying bonuses over time, or delaying payments, include the impact of those payments on current employees who do not receive similar treatment (and it will not be a secret). A delayed bonus might also be less attractive to the applicant in the recruitment process. Employers should also be mindful of employees who are represented through a union, as the payment of additional wages, other than those contractually agreed upon, after employment has begun would be subject to mandatory bargaining.

In sum, there are several options for employers in offering compensation packages to attract new employees. However, the various classifications of bonuses and timing of payment have corresponding obligations and risks that employers should consider.

Robert R. Siderius, Jr joined JDSA Law in 1986 and now serves of counsel. Bob provides assistance with labor and employment, municipal law, contract law, commercial and real estate transactions and agriculture law.

Peter L. Schoening is an associate attorney at JDSA who joined in 2023 after graduating from Seattle University School of Law. Peter’s legal practice primarily involves intellectual property, real estate, family law, and general business matters