We all know that a repayment agreement is a legal contract between the lender and borrower that outlines the steps for repaying a loan.
But what about a relocation repayment loan for an employee?
When you have made a considerable investment in relocating top talent, you need to ensure that the repayment agreement is legally enforceable. In fact, without taking the proactive step of framing a valid agreement, you might be risking legal complications.
In this article, we will outline the details of a repayment agreement to help you form a clear idea about it.
An Agreement Tailored For Employees
As an HR professional, you can use a personalized relocation loan or mortgage as an incentive to help your organization stand out from the competitors.
Note, this special support is provided beyond the standard relocation package designed primarily for upper-level employees. However, a relocation package can be designed for junior executives as well.
What makes a relocation loan attractive for an employee is a fixed interest rate, which is usually lower than market rates. Other than that, there is less waiting period for the loan to come through.
In most cases, the loan is collected back through payroll deductions or installments. But at times, the labor laws in your jurisdiction can make it unlawful to make deductions from an employee’s salary without written consent from the employee. Besides, you can’t reduce the pay beyond a minimum figure. That makes repayment agreements a necessity.
Before extending a relocation loan, the eligibility for a relocation loan and the reasons behind a loan grant should also be mentioned. A loan should also be used for the purpose stated.
That said, in some cases, the employee may have personal reasons for taking a loan during relocation. So you may allow non-disclosure of the specifics.
The agreement usually mentions the following details.
- The information and signatures of the debtor and creditor
- The date when repayment begins
- The amount of each repayment
- The interest rate
- The number of payments
- The due date for each payment
- Default provisions and consequences related to late payment or non-payment
However, there is more to the relocation contract than that.
The fact is, you do not want an employee to leave and join a competitor within a few months of
relocating without paying back. So this is not just a contract to pay back the money, but also an agreement to safeguard your investment.
In case the employee resigns within a specific period from the relocation, the expenses incurred from the company’s end should be paid back. On the other hand, the obligation of the employee for repayment will lapse in case of a termination. The repayment agreement acts as a guideline for the process.
As an employer, you may need to create different forms of an employee loan repayment agreement for different employee levels. The loan amount can vary between $1,000 to $50,000 or more, depending on the employee details.
Points to Consider in a Repayment Agreement
In reality, your aim is to provide the best relocation support to the employees from all aspects. So make the agreement as simple as possible and avoid any surprises for the employee.
Here are some points to keep in mind while formulating a repayment agreement.
Setting Repayment Terms
Note, the labor laws in your area can limit the deductions you can make from the gross remuneration of an employee. The rate of interest to be charged can also be regulated by law. These factors are to be kept in mind before finalizing a written document.
In some cases, an employee may choose to pay back a loan through periodic installments instead of income deductions. The repayment agreement needs to include the necessary terms for the plan.
In case the employee resigns before the loan is repaid, the outstanding amount should be deducted from the final settlement.
It may happen that the final payment is insufficient for recovering the outstanding amount. In such cases, the employee should make a separate payment to the company as repayment.
The employee loan repayment agreement should also mention the steps in case the loan is not repaid within a specified time period. Under such circumstances, the organization is free to take legal action against the employee.
The Loan Duration
Usually, the loan term is calculated by dividing the loan amount by the number of monthly payments. Interests payable for each month are also added to the calculation.
In most cases, employers prefer to keep the loan period within two to three years. One reason is, for any organization, sustaining a long-term loan plan is difficult.
Also, in the long-run, termination of employment may happen. In such cases, termination laws of a state can prevent the recovery of the outstanding loan amount.
Keep in mind, any tax liability arising from the loan during this period should be the responsibility of the employee. Even so, tax issues can be tricky. So take advice from your tax lawyer.
Other than that you can also include the terms related to early repayment if necessary. Some employers also create a separate employee advance repayment agreement for that purpose.
Handling Defaults
Any loan repayment agreement should clearly state what constitutes a default or failure to pay from the borrower’s end. It should also mention the actions the lender can take in the event of a default.
Usually, default occurs when the borrower fails to pay a lump sum amount or an installment on a specified date as mentioned in the agreement. In such cases, the amount of principal and accrued interest become due for immediate payment. A penalty for late payment can also be included.
However, as an employer, you can extend a grace period to an employee. The HR department can discuss the issue with the employee and find a solution if possible. But in the case of an employee who has left the service, such a step isn’t possible.
Beyond that, a default can lead to a breach of contract. This allows the organization to take legal action against the borrower to recover the outstanding amount. Other related expenses like attorney fees, court costs, etc. can also be recovered.
Conclusion
An employee repayment agreement for relocation loans is a must for protecting your investment. Point is, this is not just a repayment contract but an important aspect of employee retention. So make sure you draft it right through expert legal guidance.
If you are new to the complex functioning of the relocation industry, think of taking the support of a professional service like ARC. With the support of the latest technology and innovation, we aim to redefine the concept of relocation through our services.
Feel free to contact us for more information.