Signing Bonuses: Getting the Terms Right
In the increasingly competitive job market, more and more employers are offering “signing bonuses” to secure new hires. These are often substantial lump sums. However, if the new hire does not work out, the employer faces the risk of having wasted the money. Employers therefore need to carefully consider how they structure any signing bonus and consider adding terms that require employees to repay the signing bonus in some situations. Here are a few tips:
- Make any “signing bonus” payable no earlier than after successful completion of probation: at a minimum this ensures you have had a reasonable chance to confirm the employee is a good hire;
- Consider making the bonus payable in installments with second and/or third installments only due if the employee remains employed for longer periods of time such as 6 months or a year. This makes your signing bonus function as a retention tool;
- Stipulate that all or a pro-rated portion of the signing bonus is repayable by the employee if the employee terminates employment prior to completing a defined period of active employment e.g. 24 months. This reflects the economic reality that employers paying signing bonuses expect they will get a minimum period of service in return. Many employers only require repayment if the employee resigns or is terminated for just cause but it is open to employers to make the bonus repayable even if the employee is terminated without cause.
- If you want to be able to deduct signing bonuses from other wages owing to the departing employee, you will need to document the bonus as forgivable “loan” to comply with Employment Standards restrictions on deductions from wages.
While in practise many employers may not seek to enforce repayment provisions in signing bonuses, there is no question they act as a deterrent to early departures, thus as a useful retention tool.
We would be pleased to assist your organization in drafting signing bonus terms.
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