What Is a Relocation Agreement?
Relocation agreements are common features in modern corporate life. Companies often pay for the relocation of employees who have been required to move as a result of their employment. A broad definition of a "re-location agreement" captures literally any re-location of any person from place to another. For example, a one year contract between an employee on secondment to Indonesia would be a "re-location agreement" in the broadest sense. However, "re-location agreements" are probably only useful in the context of this post in their very specific, ordinary meaning. In the more specific ordinary meaning , "re-location agreements" refer to those agreements that are usually entered into when an employee is offered a position that requires him/her to move his/her residence to another location, usually in another country.
A simple definition might be that a "re-location agreement" is a legally binding agreement that governs the subsequent transfer of an employee from their former location to the intended new location as a result of their employment. A "relocation agreement" should address the cost of moving and the benefits to be provided to the employee and their family as a result of the re-location.
Key Components of a Relocation Agreement
In order to ensure the enforceability of a relocation agreement, employers should carefully consider the essential components that it contains. These components include: relocation benefits, duration of the agreement, and employee obligations. It is important to clearly set out the terms and conditions applicable to the employee’s work location. It is recommended that the agreement be forty-eight, rather than twenty-four months, in duration. Depending on the nature of the contemplated relocation, the agreement may also require the employee to devote a certain amount of time to work in connection with the new location within those forty-eight months to be eligible for the relocation benefits. The relocation agreement should clearly set forth the employee’s obligation to relocate and the general timeframe within which the relocation is to be accomplished. Finally, the relocation agreement should clearly set out the consequences of the employee’s breach of the terms contained in the agreement, including the potential repayment of bonuses and relocation expenses.
Legal Considerations in a Relocation Agreement
Legal considerations are paramount in the drafting and execution of a relocation agreement. Foremost, the fundamental obligations of the employment relationship continue notwithstanding the execution of an agreement. For instance, the duty of loyalty continues, as does compliance with confidentiality obligations. Here, however, we examine special legal terms that should be considered in constructing or evaluating an agreement.
In many instances, a company will want the person signing the relocation agreement to waive or assign any claims the employee might have against the company. It is essential that the company complies with applicable law on this point. For instance, if the employee will be receiving a severance package greater than what is otherwise owed as consideration for the conduct of the employee, an enforceable release of age discrimination claims under the Age Discrimination in Employment Act (the "ADEA") requires that the company comply with the ADEA statute. The ADEA statute requires that the release itself be written in a way that clearly demonstrates that the provisions of the release and the application of the release are specific and detailed. A standard general release will not suffice.
Under the ADEA, a detailed disclosure document must be attached to the release language. The ADEA also sets forth a seventeen (17) day minimum period in which the employee must consider the release. The ADEA list of rights that must be disclosed includes the right to file charges with the EEOC and the right to file a private civil action. The release must also state that the employee may revoke the release within seven (7) days of signing it.
The Age Discrimination in Employment Act ("ADEA") governs protection against discrimination due to age. 29 U.S.C. §621 et seq. This statute is similar to the National Labor Relations Act in protecting individuals in the termination or non-renewal of an employment relationship. 29 U.S.C. §623. In fact, the basic formula for what constitutes an illegal termination under both the ADEA and the NLRA is the same—an employer is prohibited from terminating, suspending, demoting or taking other adverse employment actions against an individual based upon certain unfair motivations, such as the individual’s age or union activities. In the case of ADEA, the unfair motivation is obviously age. The protected class under NLRA is union membership.
There are some key differences between the statutes that advise what may and may not be done, under the ADEA and the NLRA. An ADEA notice of rights cannot contain language that appears to make a statement against public policy. The NLRA does not impose this restriction on notices relating to subjects involving collective bargaining agreements. Another important consideration is the timing of an ADEA claim. An ADEA claim must be filed with the Equal Employment Opportunity Commission ("EEOC") within 180 days after the last act of discrimination. The NLRA limitations period is longer.
Assuming the company is making an express offer in relation to the employee’s relocation, in order to implement the relocation, the company must comply with all applicable labor laws.
One key issue is what the differences are between the relocation package offered the employee and its corresponding pay-off. The payment of the pay-off must adhere to all legal requirements. For instance, investment income and earnings may be subject to income tax. Equity compensation may have the same protections afforded to employees’ 401(k) savings plans, and to that end, consideration should be given to whether the relocation bonus may be deposited in the corporate-sponsored 401(k) plan. The relocation pay-off must likewise be reviewed in light of state laws to insure compliance with all state tax regulations.
Pros and Cons of a Relocation Agreement for Employers and Employees
From the Employer’s Perspective
From a business perspective, a properly-crafted relocation agreement allows the employer to structure an employee’s departure in a way that helps ensure smooth transition and portability of vital company knowledge and prevents the loss of critical talent to a competitor (for example, the employee’s new employer). For many employees making a lateral move, geographic mobility is one of the few perks to which the employee has access. Accordingly, these employees may be inclined to accept a position with a new employer that ensures relocation assistance. By the same token, local companies have a competitive advantage in areas with high employee mobility in offering relocation assistance and, thus, are often the target to a local employee moving to a new position. Including reasonable relocation costs and other benefits in an agreement encourages even the longest of tenured employees to remain, and to keep the company informed of the impending change. These facts make adapting flexibility in a relocation agreement critical to both the employer and the employee and can help to avoid future disputes or the need for other remedies.
From the Employee’s Perspective
For employees, knowing that the opportunity is not only available (but almost assured) to relocate is a great incentive. Employees benefit from relocation assistance through the payment of moving costs, purchase of real estate, payment of real estate taxes, temporary housing and a variety of other benefits designed to minimize the financial impact to the employee (spouse, children and extended family) of a move. Moreover, to the extent that the relocation agreement carefully and thoughtfully rides that line between prudent and commercially reasonable, it will minimize financial risks to the employee of unpaid expenses after the fact and costs of moving that may not be covered by the new employer. Relocation agreements should also offer an attorney review (at the employee’s expense) before signing to avoid disputes later on whether the costs of relocation were covered.
How to Negotiate a Relocation Agreement
Negotiating a fair relocation package is critical for employees, and it can also be beneficial for employers. A poorly structured deal may not only leave the employee dissatisfied, but may also have tax implications for the company.
For Employers
Employers should clearly outline what expenses are being covered. While clearly outlining what is being covered is beneficial for the employee, it also discourages misunderstanding by the employee and reduces the chance they will seek to be compensated for relocation-related expenses that were never part of the agreement. Employers may want to consider offering a lump-sum payment to cover expenses, rather than covering each item individually. A lump sum provides the employee with the greatest flexibility in terms of using the funds, while minimizing the headache of securing receipts for reimbursement. Similarly, offering a cost-of-living increase gives the employee the peace of mind of knowing that they’ll be better able to afford the potentially higher cost lifestyle of their new location. Know that there are limits on how much can be contributed via these methods . The IRS allows employers to give employees up to $5,250 in relocation benefits without any tax penalties to the employee or additional reporting requirements for the employer.
For Employees
A relocation agreement is not a take-it-or-leave-it marriage. The employee can and should negotiate for additional reimbursement and benefits. It is a good idea to outline a list of expectations, beyond job duties, such as for relocation costs and remote work flexibility. Many companies offer a tiered relocation package that provides different amounts of financial assistance based on how far the employee is moving. Meaning, the farther away they are moving, the more generous the relocation package. This tiered relocation package may also be tied to seniority, providing differing levels of benefits to different tiers of positions. Further, since there will be towns and cities where the cost of living is only somewhat lower than in the home city, such as for fees associated with finding and closing on a home, employees should make sure that the same amount of time and money is spent by the company on their behalf as on others.
Common Errors in a Relocation Agreement
Unfortunately, despite the best of intentions, mistakes can be made when drafting a relocation agreement or trying to pinpoint whether the separation agreement they have is a valid one. Some of the most common mistakes include:
Parties Do Not Have Full Knowledge of the Issues
This is one of the most important issues. This is the reason that thorough discovery is so important before executing any agreement. If all relevant information is not revealed at that time, then there may be a big problem later on. This is especially true with respect to seasonal or third party income, pensions and retirement accounts, second properties, and, unfortunately, hidden assets. There are many a family business found hidden in a spouse’s name only. Exposure of the tax consequences of certain distributions or transfers can have a serious impact and should also be addressed before the agreement is signed. Given these circumstances the parties should make every effort to fully disclose their full state of affairs, both financially and personally, prior to entering into the agreement.
Parties Do Not Have Independent Counsel
Ideally, both individuals should have independent counsel who understand the ramifications of the agreement, and are familiar with the employment laws in the people’s home country.
Don’t Take for Granted that a Court Will Enforce an Agreement
Employers should take care to ensure that any provisions that are specifically contrary to Chancery, family or labor laws in the jurisdiction the parties will reside in, those provisions will be deemed void and unenforceable. The employer may mistakenly believe that they are protected, when in fact they are not.
Future Trends in Employee Relocation
The trends of globalization and the on-boarding of a younger workforce are having a significant impact on relocation patterns, leading to a growing number of employees opting for localizations that allow them to work from home or travel compared to relocations that require them to uproot and move. In turn, this is likely to lead to fewer cases where employers can expect that the relocation policy options that have worked in the past will continue to be relevant in the future.
Globalization and the pervasiveness of technology is reducing the number of assignments that require a physical move of the employee. At the same time, demographic trends suggest an increasing workforce that is not as keen to leave their home location for extended periods but would rather be given the capability to work from home or travel. Accordingly , the demand for relocation policies that allow for exceptions and market-leading counsel is likely going to increase as companies focus on accommodating employee needs.
Expect to see flexibility and the ability to choose mobility options that are unique to each employee become the expectation. Businesses will increasingly offer their employees solutions that take their specific needs into account. This trend is also expected to shape not only policy options, but the way relocation and global teams interact with their employees. When the employee has a wider variety of options to choose from, and options that are most appropriate to his/her/their needs, it becomes even more important for internal mobility teams to act as trusted advisors to guide them.