Got a Signing Bonus? Here's When You Might Have To Pay It Back
You’re ecstatic. You got the job you wanted with a hefty signing bonus. You’ve signed your paperwork, and you’re looking forward to a long and fulfilling career — until you’re not. Within the first year or two, you realize that this isn’t the job for you and decide to resign.
But what about that lump sum you received as a signing bonus? Unfortunately, signing bonus clawbacks are real. Here’s when you might have to pay the money back.
Consider This: How Investing a Little Each Paycheck Builds Wealth
See for Yourself: How Middle-Class Earners Are Quietly Becoming Millionaires — and How You Can, Too
When Do Employees Usually Have To Repay a Signing Bonus?
Harvey Linder, an employment and labor law attorney and partner at CM Law, said the most common reason employees have to repay a signing bonus is when they voluntarily resign within a certain period after starting employment.
He said the most common time periods he sees are one to two years. However, sometimes, he sees longer periods.
“With the signing bonus, employers believe they are buying an employee’s loyalty and service for a reasonable period of time,” he explained. “For executives, the times may even be longer than for the average employee.”
What Employees Should Consider Before Accepting
Before accepting a signing bonus, Linder said the employee should carefully review all reasons an employer may recoup the signing bonus, such as resignation, layoff, termination with or without cause, or disability.
He also recommended verifying the period the employee must work for the employer before the obligation to repay expires.
Read the Repayment Clause
Repayment clauses connected to signing bonuses can require full repayment or a prorated amount. This matters if you resign before the clawback period ends.
If your contract is for a prorated amount, this is the formula used to calculate what you’ll owe, according to Leon Consulting:
Repayment Amount = Total Bonus x (Months Remaining / Total Commitment Months)
For example, if you received a $20,000 signing bonus that you didn’t have to pay back as long as you stayed employed for 24 months, and you decided to resign after 14 months, you’d have 10 months left in the agreement.
With a prorated agreement, you would owe $8,333.33.
If the agreement requires full repayment, resigning before the clawback period ends could mean repaying the gross bonus rather than the amount you actually received after taxes. For example, one Reddit user said they were considering leaving a job that turned out to be very different from what had been promised.
However, their contract required them to repay the bonus in full before taxes if they left within the first year. The poster said the bonus was worth multiple hundreds of thousands of dollars, and the tax portion alone was large enough that they would need a loan to cover it until they could sort through the tax consequences.
Can an Employer Force You To Repay a Signing Bonus?
Linder said this is a tough question. He explained that employers may have difficulty recovering a signing bonus if the original offer letter or employment agreement does not spell out how repayment would work.
“This varies from state to state,” he added. “Some states will permit recoupment via litigation or otherwise; others will not, or will make it almost impossible.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion: