What Employers Need to Know About Sign-On Bonuses

A typical sign-on bonus language in an employment offer letter will state that an employee's compensation is to include a "one-time, discretionary sign-on bonus in the amount of $x". The most common issue relating to sign-on bonuses is related to repayment obligations.

To minimize the likelihood of disputes over repayment of a hiring bonus, employers should clearly outline their employees' repayment obligations in the offer letter. The following language can be used as a guideline:  "Employee agrees to repay this bonus payment in full, shall he resign or be dismissed for cause prior to one-year anniversary of his employment with Company". This type of language protects the employer's right to repayment, and it also protects the employee on the other end of that agreement from having to repay the bonus, if he is terminated for insufficient performance, or some other reason lesser than serious misconduct or violation, or if that employee is simply laid off due to restructuring or reduction in force.   

The problem with the above bonus repayment language from an employee's perspective is that he could potentially work for almost a whole year and then have to repay the bonus, just because they quit right before that one-year anniversary.  To avoid this situation, an employee may request that the bonus repayment language be modified to include some type of pro-rata reduction in bonus repayment obligation.  A typical arrangement can be as follows: an employee's sign-on bonus repayment obligation is to be reduced by 1/12 after each month employment.    

The above terms are of course highly negotiable and the parties are free to agree on whatever bonus repayment terms they deem reasonable and acceptable. The important part is to clear about what these terms are and keep the above points in mind. 
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