Are retention bonuses a good idea?

“If your organization’s having a retention problem, I would suggest that they would first consider whether there’s underlying issues that are causing that problem before they jump right to the retention bonus. Because ultimately, if the underlying issues aren’t resolved, then the organization is going to continue to experience turnover.”

So says Maggie Hughes, associate at Сox and Palmer in Charlottetown, when asked about whether or not stay-or-pay clauses are a good idea for employers to contemplate in today’s tough jobs marketplace.

While not so common in Canada, according to Hughes, the practice seems to be expanding south of the border.

The New York Times recently reported that retention bonuses and stay-or-pay contract language is a growing phenomena that not only applies to executives, but to front-line employees.

But are they allowed here in Canada?

“In terms of being legal, we have freedom of contract here in Canada and as long as the language of the provision is clear, and unambiguous, then parties are free to contract and that goes the same for employers and employees,” says Hughes.

Paying for training

Another similar way to encourage employees to stick around is the practice of paying for an employee’s education, then binding this into the employment agreement. This is known as a training-repayment-agreement provision (TRAP).

The contract is designed for an employer to recoup training expenses if a worker decides to jump ship for another organization, after going through a course ostensibly to improve the employee’s performance in the organization.

So what do employers need to know about legally preparing these arrangements?

“The employee must agree in writing to repay bona-fide training expenses. This agreement — which is what are referred to as agreement or a TRAP — must be clear and unambiguous,” says Jeff Dutton, employment lawyer with Dutton Employment Law in Toronto.

As well, the contract must provide a formula for repayment, and can only cover training expenses, not business costs, says Dutton.

“The damages stipulated in the agreement or the TRAP must not be a penalty; rather, they must be a reasonable pre-estimate of the actual cost of the training. In this way, the damages should be decreased based on the length of employment in the agreement.”

In order to be compliant, the training must provide a benefit for both employer and employee, he says.

“In other words, the training should be transferable; skills that the employee can take elsewhere.”

And while the dollar figure should not be “excessive,” there are certain cases in which damages may be awarded, says Dutton, while keeping in mind that non-competes are not allowed in certain jurisdictions, such as Ontario.

“I would suppose the courts would likely tend to favour a TRAP agreement that contemplates damages in the event that the employee leaves work to work for a competitor, over a blanket TRAP, in the event of without cause termination or even for cause termination.”

Tool for attraction?

With many employers crying out for new blood, amid ongoing labour shortages, this trend might be considered for employers, says Hughes.

“I think it will be interesting to see the data in a few years; for example, how long do people who signed these employment agreements with retention bonus provisions actually stay with the organization versus those who aren’t subject to those types of clauses? And then if the market changes, and we’re in a situation where there’s less options for employees, maybe they’re not necessary at all.

“But for now, where we’re at in the economy, we’re seeing more and more people trying to incentivize with a retention bonus but it’s really a recruitment tool and I think overall, they probably help with recruitment,” she says.

While their efficacy is still unknown, for some employers, making it known that you are offering a “good-faith, mutual investment in one another” might backfire, says Hughes.

“I do wonder if maybe that, on the flip side, you could be losing out on certain candidates who don’t know whether or not they would commit to an organization for a lengthy period of time. So to say, ‘Maybe I would consider going there but if I can’t stay the year for other reasons that I don’t want to have to pay it back.’

“You might lose out on good candidates.”

What employers in Canada are the best and worst at retention? A new study recently analyzed the top 100 organizations.

Keeping disengaged workers on board

For employers, having in place a number of stay-or-pay agreements may not work out as intended, she says.

“There could be a fear that you have employees who aren’t performing or aren’t happy at work and they’re just there for the period that the retention bonus clause lapses.

“You could see yourself in a situation where you have employees who aren’t performing, they’re not happy, they’ve got low morale, but they’re sticking around because they don’t want to have to pay back this bonus,” says Hughes.