“Is sign-on bonus repayment to an employer ‘before taxes’ or ‘after taxes’?”

Question: My employment contract mentions “You will receive a sign-on bonus of $3,000, subject to all deductions and withholdings required by law. Should you voluntarily leave less then 12 months after you begin employment, you will have to repay a prorated portion of your sign-on bonus.”

My question is “Should I pay back the $3,000 ‘before taxes’ or ‘after taxes?”

Springfield, Illinois

Answer: Dear Rose: The answer is “Almost definitely, before taxes.” Here’s why:        

1. Contracts are to be interpreted, first, by their words. Your employment contract, like all contracts, must first be examined for what, if anything, it says about the “before taxes” or “after taxes” issue. Every paragraph, every sentence and every word must be read very carefully.

Because I don’t have your entire contract in front of me, I cannot be certain what else it might say besides the two sentences you’ve provided. For this reason, I use the phrase “almost definitely,” instead of “definitely” in my answer.

2. When the words of a contract do not provide an answer, only then do we look at other factors, such as (a) what is most reasonable to imply, (b) what is the custom or practice in the industry, and (c) what would make most sense in this context. For example, could “$3,000” mean (i) in Canadian dollars? (ii) in Tibetan dollars? (iii) in silver dollars? (iv) in Monopoly (the board game) dollars? Not at all likely, since you live and work in the United States, the reasonable, customary and sensible conclusion is that it means “in U.S. dollars.” In my experience, both as a lawyer and as a person, I believe quite firmly the reasonable, customary and sensible understanding would be that you must repay the sum “before taxes.”

3. Does that damage you, because you received “after tax” dollars and may have to repay in “before tax” dollars? No. All it means is that you paid tax dollars to the government on wages you had to return, and therefore did not really earn. You will recoup what you “overpaid” in taxes when you file your next tax return, either by paying a smaller amount due, or by getting back a larger tax refund. Is it an inconvenience? Sure. Damage? No.

4. Note that the use of the word “voluntarily” in your contract may save you from having to repay anything at all. Rose, as I noted above, you must look at the words of a contract to determine what your rights and obligations are. We have “invented” a useful concept called “Involuntary Resignation” which may just make it unnecessary for you to repay anything. The idea behind “Involuntary Resignation” is that there may be many reasons for you to cite, when you resign, that your resignation was not really “Voluntary,” but rather “Involuntary.” These reasons might include, among others, (a) your being harassed or treated with great hostility; (b) your belief that you were being discriminated against; (c) your belief that you were being urged to engage in improper or illegal conduct; or (d) your belief that you were being retaliated against for objecting to a wrongful practice or dishonest procedure. There are many, many other reasons, too, why your resignation may be “Involuntary,” and as your contract says, you only have to repay your sign-on bonus if your resignation is “Voluntary.”  

If you’re interested in reading more about this, review my newsletter on “Involuntary Resignation” by simply [clicking here].

You may also want to watch my free YouTube Video entitled “Involuntary Resignation – Standing Up, Not Giving Up, To An Intolerable Situation At Work.” If you do, just [click here].

And, too, if you’re interested in obtaining a Model Memo you can use to Involuntarily Resign, just [click here].   

Hopefully, Rose, you’ll stay at least the full 12 months. But, just in case you don’t, this information should help you. Thanks for writing in.  

Al Sklover

If you agreed to repay your former employer (a) tuition reimbursement, (b) relocation expenses, (c) a sign-on bonus, or even (d) a short-term loan, you may be able to have that obligation waived and forgiven. To obtain a copy of our Model Memo entitled “Model Letter for Repayment Obligation Forgiveness – with 18 Great Reasons,” just [click here.] “What to Say, and How to Say It.™” – Delivered by Email – Instantly!

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© 2012 Alan L. Sklover, All Rights Reserved.

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