What is a Relocation Expense Reimbursement Agreement?
Relocation expense reimbursement agreements are provisions found in employment agreements, and more commonly in employment contracts of executive or "high-end" employees moving long distance for a new job. A reimbursement agreement provides that if an employee voluntarily resigns his employment prior to the expiration of a specified period of time (usually one, two or three years), then the employee must reimburse the employer for all or a portion of the expenses incurred in relocating the employee to the new job location.
These reimbursement agreements are intended to discourage high-end employees from voluntarily terminating their employment (because doing so will cause the employee to incur a financial loss) and to recoup costs incurred when the employee voluntarily terminates prior to a specified period of time. Most employers will not , however, actually seek reimbursement from an employee who involuntarily terminates his or her employment through no fault of his own, such as a lay off for economic reasons, because payment of these costs to such employees would not have served any useful purpose.
It is important to note that relocation expense reimbursement agreements cannot be unilateral; they must be agreed to in advance by the employee and the employer and included in the employee’s written employment agreement.
Key Elements of the Agreement
The key components of a relocation expense reimbursement agreement are broad categories that cover how costs are covered. These can include travel, lodging and meal expenses when searching for housing in the new location; temporary living expenses and ancillary costs like child care; the costs associated with the sale of a home; the costs associated with purchase of a new abode; storage costs; cost to make the "old" house marketable; mortgage interest differentials; and other incidental costs.
On the other hand, a self-funded corporation may elect simply to provide that a percentage of a salary increase will be paid out upon relocation. Of course, relocation agreements can be made to exclude any number of these items.
It is also common to see an appropriate formula for adjusting the actual cost to an average cost so that floods of employees do not take advantage of special circumstances by over-spending and getting rich at the company’s expense. Indeed, an agreement can even permit the employer to cap its share of certain costs, such as the monthly costs of temporary housing or a certain period in storage.
Particularly when executives are involved, it may also be important to provide a periodic update of the status of the agreement as it relates to the payments already made, the length of the amortization period, and the remaining principal balance.
While most often associated with a forced relocation (involuntary discipline), such an agreement can be created to accommodate voluntary relocations as well.
Legal Considerations and Compliance Issues
Companies considering or currently using Relocation Expense Reimbursements need to consider the tax and regulatory ramifications of such agreements. As most know, under Section 61 of the Internal Revenue Code all forms of compensation are generally subject to income and Federal Insurance Contributions Act (FICA) taxation. However, the IRS has determined that a Relocation Expense Reimbursement is not to be treated as taxable compensation in the year the reimbursement is provided, so long as (1) the reimbursement is provided under a written plan and (2) the reimbursement is done within the first 12 months after a new hire moves to a new location. (IRS Announcement 2002-4) The IRS has also ruled that an employer may reimburse the actual moving expenses of a new hire, and again so long as it is provided under a written plan, that reimbursement will not be considered taxable compensation. (IRS Revenue Ruling 2004-60) The employer must also make a timely report of any taxable compensation through the appropriate methods (W-2, 1099-MISC).
It is advisable that companies clearly state in either their offer letter or a written plan which obligations are reimbursable. Most importantly, the agreement should state that the reimbursement is only for relocation expenses and not for items like mortgage insurance, closing costs, home repairs, house cleaning, car repairs, etc. Further, the company should consider if such reimbursements qualify for the Federal Tax exemption and if not, whether the benefit will be considered taxable income to the employee. As with any compensation, it is important to properly track and report such reimbursements.
Benefits for Employers and Employees
Relocation expense reimbursement agreements (REAs) have a number of benefits to both employers and employees.
REAs set the rules for compensation in the event a company transfers an employee or an employee relocates to a new employer. REAs define the responsibilities for reimbursement of expenses in the event of a transfer or voluntary resignation prior to the end of the settled upon term of employment at the new worksite as well as the consequences of moving an employee back to the old worksite without the new employer’s prior written consent. The absence of any such agreement ignores these issues and subjects the employer and employee to the uncertainties of governing common law or statutes.
An REA can also prevent disputes about what constitutes reasonable moving expenses. An employer may be willing to pay only some of an employee’s moving costs , but won’t compensate an employee if there is a disagreement over what is "reasonable" or is necessary to obtain tax deductibility.
An REA provides certainty. Both parties know what their respective rights, obligations and consequences are, which can avoid costly disputes, litigation and employee turnover.
There are other events that might occur where payments or reimbursements might be needed, but would not have happened if the employee had not relocated. An REA can take some of the guesswork out of the situation by providing for how to allocate costs that have been incurred, or need to be incurred. This takes the burden of determining how to address these costs off of the employer and also prevents a dispute between the employer and employee over the allocation of the costs.
Common Pitfalls and Solutions
As with any agreement, there are common issues with relocation expense reimbursement agreements. A few of those are discussed here, along with some ways of addressing them.
One of the most common problems involves the amount of expenses that are reimbursed. Most relocation expense reimbursement agreements do not require the reimbursement of all moving expenses. Many agreements only reimburse a certain amount of the moving expenses and others reimburse expenses based on a formula. The higher the level of employee is reimbursed, however, the more likely it is that "all" or "most" reimbursable expenses will be paid. Even the limiting language from the relocation expense reimbursement agreement will tend to be waived for high-level employees. As a result, the lower-level employee has more disputes over whether the expense should be reimbursed.
A related problem is that sometimes the moving expenses paid do not reflect an appropriate amount of cost; this can happen especially when the employer’s contracted moving company can charge additional fees and move dates change. The best way to address this issue is to ensure that the expenses are as clearly and specifically set forth as possible in the relocation expense reimbursement agreement. Then, there is less room for argument over what will be paid. However, for employees below the highest level, there may be practical issues, such as not getting the thorough documentation of every move expense.
Another problem occurs when the employee feels that the employer has not approved the expenses in a timely fashion or, occasionally, when the employee thinks that the employer is interfering with the employee’s move or encouraging the employee to move otherwise than the agreement provides. In those situations, the best solution is to have a conversation with the employer to determine if the employer is involved or if there is a reasonable explanation for the delay or other action.
Likewise, the employee may want to discuss with the employer any disputes with the moving company. Some moving companies treat the employee as the employer’s agent and take the employee’s word for the validity of the expense without further investigation. Sometimes the employee may be more involved in the move process than the employer is, so discussions between the employee and employer may help avoid disputes.
As noted above, many employees question the reimbursement of moving expenses. Often this is countered by the employer discussing the specific cost issues with the employee and showing the employee why the expense is not being reimbursed. However, in some cases, the employee’s need for reimbursement is higher than anticipated at the time of moving and the parties have no dispute about the payment of the assisted move expenses. In that case, the parties can agree after-the-fact or later, and the employer can waive the requirements for documentation for the expense.
Relocation expense reimbursement agreements typically have roughly equivalent requirements for documentation and payment. However, issues related to moving expenses are often different for different employees and positions. Often things that are not paid may not be in the moving quote, may be outside the initial agreement, may not be well-documented, and may be paid immediately or paid later in the moving process. Often it is simply a matter of having a conversation with the employee and coming to a mutual agreement on how to address them.
Like most legal writing, the provisions of a relocation expense agreement should be clearly stated. Unfortunately, sometimes the payment does not make economic sense under agreed terms because more expenses have been incurred than anticipated, or the employment relationship has changed so that it is no longer clear whether the employee is entitled to reimbursement. In these types of cases, the parties can normally come to an accommodation that is acceptable to everyone.
Creating a Balanced and Effective Agreement
When it comes to drafting a fair and effective relocation expense reimbursement agreement, organizations should consider the following tips before moving forward:
BE CLEAR IN THE INTENT AND METHODOLOGY OF THE AGREEMENT – Make it clear that providing relocation expense reimbursement is a recruitment tool, and that the goal of the agreement is to encourage individuals to accept employment or a position in the organization.
BE THOROUGH AND MODULAR – Make sure the agreement covers a wide range of scenarios and provides modular sections based on the individual circumstances.
DON’T BE TOO SPECIFIC (OR TOO STUPID) – Make sure the terms are relatable and do not limit the scope or range to the point where either party is put in a difficult situation. Engaging the employee in the process also helps in managing expectations and outcomes.
USE SIMPLE LANGUAGE – Avoid ambiguous words whenever possible. The agreement needs to be easily understood by everyone involved , including the parties, and even third parties such as a tax consultant.
USE CONSISTENT AND REASONABLE TERMS WHEN APPLYING FOR REIMBURSEMENT – Inconsistent and unnecessarily common terms are unrelatable.
INCORPORATE A SOFT CLOSURE WITH ESTABLISHED CAVEATS – Include a clause stating that the agreement does not guarantee continued employment nor does it amend any employment-related agreement.
CONSIDER CONFORMING TO IRS GUIDELINES – Ensure that the expense reimbursement program complies IRS guidelines, as the costs will need to be accounted for in the organization’s tax liability.
PARTICIPATE IN ORGANIZATION WIDE BEST PRACTICES – Ensure that both legal and tax objectives are met.