In competitive job markets like the current one, it is not unusual for employers (and firms working with them) to offer prospective workers training in specialized areas as incentive to accept employment. For many businesses looking to develop staff in response to talent gaps, the investment in training can be significant.
But what happens if the employee your company has spent weeks or months training quits or leaves to take another offer before the agreed-upon term of employment is up. Can your company legally recover the investment in that employee from him/her?
Liquidated damages provisions in Arizona employment agreements
Under Arizona law anyway, where a contract (such as an employment agreement) provides for a party’s remedy in the case of a breach by the other party, the provisions of the contract generally control. For example, you and your employee might agree in advance that you the employer will receive a certain sum of money in the event that the employee breaches their employment agreement. We attorneys call these “liquidated damages”.
As explained by our Arizona Court of Appeals In Pima Savings & Loan Ass’n v. Rampello, 168 Ariz. 297, 812 P.2d 1115 (App.1991):
The traditional role of liquidated damages provisions is to serve as an economical alternative to the costly and lengthy litigation involved in a conventional breach of contract action, and efforts by the contracting parties to avoid litigation and to equitably resolve potential conflicts through the mechanism of liquidated damages should be encouraged.
Liquidated damages are also provided for by Arizona’s version of the Uniform Commercial Code (Title 47, Arizona Revised Statutes):
47-2718. Liquidation or limitation of damages; deposits
A. Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
Again, it bears repeating that this article only addresses the statutory and case law of Arizona. However, the bottom line is that liquidated damages provisions are generally enforceable if, when all the facts are considered, the amount was reasonable at the time of the contract and, at the time of the contract, it was difficult or impractical to accurately estimate actual damages.
Therefore, an employer and employee could enter into an agreement providing for a reasonable sum for training to be reimbursable to the employer if employee were to leave before the agreed-upon term of employment. However, an excessively large amount obviously designed to deter the worker from leaving would likely be found to be a penalty and unenforceable.
It is important that your employment agreements must be worded properly to survive a possible challenge in the courts.
Note: Additional rules apply with H-1B Workers
Employers who hire or (as part of their business model) recruit and place workers who are on H-1B Specialty Occupation visas are oftentimes the companies that are the most zealous about recouping their training costs. These employers should be aware that additional restrictions in addition to the laws above apply.
These employers often want to know whether they can can require an H-1B employee to pay them back for leaving the employer before a certain time period.
The H-1B regulations do specify that an employer can charge an H-1B worker liquidated damages should the worker cease their employment before the agreed upon date. However, as under Arizona law interpreting such clauses, penalties for early termination of employment are prohibited.
How is an employer to know what constitutes a penalty? The Federal regulations punt on this particular question, instead explaining that the law of the state in which the employment takes place defines the difference between (allowable) liquidated damages and (disallowed) penalties.
Making matters more complicated, it is not unusual, particularly in the technology industry, for an H-1B employer to be based in one state, while the H-1B worker works or is assigned to a customer in another, possibly leading to confusion and an eventual dispute over which state’s law on liquidated damages applies. For this reason, employers of H-1B workers should avoid using a “one-size-fits-all” offer sheet or employment agreement for their out-of-state workers. They should definitely consult with an employment attorney experienced in the given state’s laws to see what that state does and does not allow.
While we often work with startup and established companies that have H-1B workers (and their immigration lawyers), this article is not intended to serve as legal advice on H-1B workers. These companies should listen to the advice of their immigration experts, as there are numerous rules and regulations regarding the employment of foreign workers and maintaining their immigration status.
Steps employers can take to strengthen the case for training reimbursement
As a Phoenix business attorney here in the Valley for nearly 20 years, I routinely assist employers of all sizes review, negotiate, and draft employment and independent contractor agreements. Employee departures are a fact of life, however if you are an employer facing the problem of workers leaving after your business has invested considerable sums training them, you might want to consider the following Do’s and Don’ts:
- DO include training reimbursement language or clauses in an offer letter or employment agreement up front, not after the employee has been in your employ for some time or has already completed the training
- DO insert specific language in your offer letter requiring repayment of the training costs in a defined amount if the employee leaves the company within a certain time period (and make sure the employee acknowledges it)
- DO (alternatively) create a one-page agreement for the employee to sign at the time the employee participates in the training program which contains the repayment obligation
- DO consider crafting the reimbursement provision based upon a pro-rated scale based on the length of employment following training
- DO make sure to frame the reimbursement provision as liquidated damages and include the proper language to help avoid a possible legal challenge, let alone a finding that the requirement is really a penalty
- DO make sure the liquidated damages reflect the true out-of-pocket costs for the training or certification
- DO (Arizona employers, especially!) include a “choice of law” provision in your offer or employment agreements making Arizona law apply in the case of any conflict or dispute
- DO NOT insert unreasonable requirements or obligations on your employee that are pretty obviously designed to punish the employee, rather than recoup your training costs
- DO NOT force the employee to sign the offer or employment agreement (and your reimbursement language); rather, plan ahead to give them the space and time they need to review it or have it reviewed by legal counsel of their choosing
- DO NOT blindly try and set-off the training costs against the departing employee’s final compensation, but rather consult an employment attorney first
Ben Bhandhusavee is the founder of BHANDLAW, PLLC, a Phoenix business and technology law firm advising early stage and established businesses on corporate M&A, technology, and finance transactions, as well as e-commerce, creative intellectual property, Internet and digital media matters. Ben can be reached at (602) 222-5542 or by e-mail at email@example.com