What is a Sign-On Bonus?
As the name suggests, a sign-on bonus is a sum that an employee is offered upon accepting his or her position with an employer. The terms of a sign-on bonus, including the amount and the multitude of ways it can be paid out, vary from job to job. An employer may offer a sign-on bonus, for instance, as a percentage of the employee’s base salary, as a lump-sum "bounty," or as a combination of the two.
Why offer a sign-on bonus? In recent years, many employers have taken to using this kind of incentive to get new hires on board. If you look at the "Rochester 100" list published by the Rochester Chamber of Commerce, almost half of the top employers in the area offer sign-on bonuses to new employees . Generally speaking, employers offer sign-on bonuses to attract top talent, encourage loyalty, reduce turnover, and stoke competition.
For employees, a sign-on bonus can provide a much-needed boost when they’re beginning a new position. In particular, for those moving from a low-cost to a high-cost area, a sign-on bonus can ease the transition from their previous job to their new position. Similarly, sign-on bonuses can be used to offset the cost of relocating for new hires from across the country or internationally.
Some negotiation is common, but not always appropriate. Consequently, an employee who believes he or she is worth the sign-on bonus should not be afraid to ask for it.
Components of a Sign-On Bonus Agreement
First, the contract or offer letter should set forth the amount of the bonus. The parties should agree on the specific amount to be paid to the employee. Commonly used and easily understood numerical examples are particularly favored, such as $5,000.00, although the agreement should specify the actual amount that will be paid. Each party should sign a copy of the agreement and the letter should be dated.
Second, the contract or offer letter should further provide a term, such as that the bonus is payable when the employee first becomes eligible to participate in the Company’s bonus plan. If there is no Company bonus plan, then the contract or offer letter should specify the date the bonus is offered, when it must be earned, and how long it may last.
Lastly, the contract or offer letter should require the employee to work a certain period of time for the Company after he or she receives the bonus, such as an additional twelve months.
Legal Issues Related to Sign-On Bonuses
Beyond the proper structuring of the incentive, the offer letter or employment agreement that accompanies any sign-on bonus should at a minimum include the employer’s obligation to deduct FICA and state and federal income taxes from the bonus and provide the correct IRS forms to the employee. A heavier consideration of possible local tax issues may be necessary when the bonus is tied to a particular state such as Pennsylvania, where the law requires that bonuses be taxed at a flat 3.07%. Employers with employees in New Jersey will also need to consider new laws that permit certain bonuses to be converted into deferred compensation or similar plans thereby avoiding the immediate tax consequences.
State wage and hour laws also need to be considered when offering sign-on bonuses. Some state laws require overtime calculations to be based on total compensation including bonuses. Unlike the FLSA, many state minimum wage laws apply to a bonus payment and not just the underlying hourly wage. These additional legal considerations may need to be addressed in the language of the offer letter or employment agreement.
How to Personalize a Sign-On Bonus Agreement Template
You can also make some additions that are specific to your industry. For example, if you are in the healthcare field , you should consider adding a provision disallowing the employee from proceeding with a malpractice claim against you. You may also need to add to the template contract language that is specific to your business. Start by listing out the elements you wish to include; use the other sections of the post to gather ideas. Tailor the list to your needs and add or remove sections from the template contract as necessary.
Common Errors in Sign-On Bonus Agreements
One common mistake found in sign-on bonus contracts is leaving too much to the imagination. Not all potentialities can ever be covered, and some ambiguity may be needed, but it’s better to err on the side of being too clear than too little. If the contract gives only a general outline of payment modalities and say nothing about payment dates or what happens if the recipient leaves the company before the first check comes, a dispute could develop.
Another common mistake is failing to spell out how the discount will be applied. Using terminology like "the amount will be reduced by an appropriate sum," leaves the matter open to interpretation. What is considered appropriate can be argued. So saying that the amount will be reduced by one-twelfth for each month short of the end of the contract period might be clearer.
Something else that is often left out of agreements—but never should be—is a section that explains how the contract may be terminated. A new employee may be afraid to ask too many questions of HR or the employer before accepting the position, so he or she won’t ask for clarification. Leaving out this clause can lead to misunderstandings and will often result in litigation when the problem finally arises.
Templates and Examples of Sign-On Bonus Agreements
There are numerous examples of sign-on bonus contract templates available online for download. These downloadable templates vary in flexibility and can be tailored to specific business cultures and practices. However, you should not simply look at the first results from such a search, but rather browse carefully to choose one that best suits your needs. An excellent place to start is the contracts offered on RocketLawyer . A prime example of a customizable contract is the Legal Templates Affiliate Agreement, which offers great detail into the terms that should be included in a well-written contract for sign-on bonuses: • The current date and location, both of which are located above the signature line • The parties, both of which should be identified by their full legal names • Where the work will happen • The duties and obligations of all parties • Confidential information protection • Compensation, including a salary and commission, if applicable • The duration of the contract • How to properly end the agreement • Dispute resolution It is important that all of the sections of the contract template are filled with complete information. Having vague or empty sections can leave the contract open to interpretation, at which point parties to the contract may debate the meaning of certain clauses. This is why contracting parties need to be specific in all the ways that they seek to protect themselves and their rights under the contract.