“Why Don’t You Take Off Your Coat and Stay for A While?” – Employment Contract Provisions That Encourage Sponsored Employees Not to Quit

As some of you may have experienced, employers can invest $5,000 to $20,000 in costs associated with obtaining an immigration visa for a promising new recruit, but some unscrupulous employees quit after working only a day or two, and port their visa to another employer.   I recently spoke at a panel discussion sponsored by Immigration Law Weekly, www.ilw.com, about whether and how, under New York law, an employer may recoup certain costs incurred in connection with obtaining and sponsoring an employee to get an H1-B visa and/or a “green card”.

Unfortunately, as I’ve learned from immigration law practitioners, applicable immigration and labor law regulations prevent the employer from seeking reimbursement of application fees and, potentially, legal fees associated with the H1-B visa, as well as for the first of the three steps to  obtain a green card (that is, the “labor certification” process, to show that the immigrant applicant is serving a special or unique role in the work force).  See, e.g., 29 C.F.R. § 655.731(h)(10)(ii) (“A deduction from or reduction in the payment of the required wage is not authorized  (and is therefore prohibited) for…. A rebate of the $500/$1,000 filing fee paid by the employer…”).

However, other attorneys’ fees and costs associated with the green card might be reimbursable.  Also, Labor Department regulations specifically contemplate a liquidated damages provision as being enforceable to recoup some of the costs associated with the employee’s application – but the same regulation also warns the employer not to impose a penalty.  29 C.F.R. § 655.731(h)(10)(i)(B).

The same regulation points to the famous case (at least, famous in New York) of BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854 (N.Y. 1999), more notorious for showing how an employer should not draft non-compete agreements or liquidated damages provisions than for showing provisions that are enforceable.  That case ended with remitting the case from the Court of Appeals to the trial court to determine whether the amount demanded was disproportionate to the employer’s estimated damages for breach of a non-solicitation provision.   (The employer had contracted for and sought 50% of all amounts the employer had billed to the “stolen” client in the previous year, adding up to over $138,000 in so-called liquidated damages.  That’s a lot of money and might not have been  proportionate to the employer’s estimated losses.  And “remand”, of course, means more litigation costs.)

However, after BDO Seidman, New York courts have been more willing to uphold liquidated damages in the context of enforcing restrictive covenants.  For example, in Crown IT Services v. Koval-Olsen, 11 A.D.3d 263, 782 N.Y.S.2d 708 (1st Dept 2004), the Appellate Division, First Department held that liquidated damages in non-compete agreement were enforceable.  (The non-compete was for one year and only prohibited the former employee’s working with the employer’s clients at the client location.)   Liquidated damages were based on $200,000 in business revenue from the employee, of which the employer’s net would be $50,000. The estimate’s reasonableness was confirmed by invoices for work employees had done before termination.  The amount sought was deemed to be a reasonable estimate of actual damages at the time the contract was negotiated and executed.  There was no indication that the transaction was anything but one at arm’s length, with neither side having the ability to take undue or unfair advantage of other.  Further, the employees were deemed “special and unique” because they had close relationships with a particular client, and they continued to work for that client after employment termination.

Similarly, in a federal case, GFI Brokers v. Santana, 2009 U.S. Dist. LEXIS 71550 (S.D.N.Y. 2009), the central issue was whether liquidated damages were disproportionate. “Only where the amount fixed is plainly or grossly disproportionate to the probable loss, is the provision deemed an unenforceable penalty”.  The court held that a significant “virtue” over a formula setting a fixed sum or imposing a mandatory minimum amount of damages was that the contract provided for a “rough correlation” between liquidated damages and actual damages that might be incurred by the employer by tying liquidated damages to the historical revenue stream generated by the employee.  Thus, the more productive the employee had been, the greater the damages.  Notably, the employee was a sophisticated businessman who discussed the terms of the contract. Even though court considered the “in terrorem” effect of not competing because of the risk of paying such damage, there was no evidence of oppressive forces at work in this case.

In contrast, in Heartland Securities Corp. v. Gerstenblatt, 2000 U.S. Dist. LEXIS 3496 (SDNY 2000), the employment agreement provided for reimbursement of $200,000 in so-called “training costs”, which “costs” diminished with each day that employee stayed with company up to 4 years. Court found that there was no demonstration of costs  the employer incurred, or of any reason for diminution of such so-called “liquidated damages,” other than to discourage employees from leaving and competing.   Additionally, the restrictive covenant was without any geographical limitation, and 4 years was held to be for an unreasonable duration. Though the employer requested that court “blue pencil” and delete only those sections that were unenforceable, court declined to do so because “the employment agreement as a whole overreached”.

However, Banus v. Citigroup, 757 F. Supp. 2d 394 (S.D.N.Y. 2010), suggests that the employer might “loan” money to the employee for green card legal fees and require repayment upon early termination.  Notably, Banus is a trial court-level federal decision, so it is persuasive but not binding authority on other district court judges or on any New York State courts.  Further, Banus was chiefly about whether an arbitration provision was enforceable, so the following could be deemed to be dictum (that is, commentary rather than a holding). Plaintiffs were securities brokers who had special compensation agreement and promissory note.  “So-called signing bonus were not bonuses at all. They were compensation advances – LOANS – whose purpose was “to ensure that they did not resign during the term of the agreement”.  To the extent the court addressed the merits of the case – rather than merely holding that the agreement to arbitrate meant that the arbitration award was enforceable – the court held that the “loan” structure was not unconscionable, in part because the loans were interest-free, substantial and to be used for any purpose.  Further, the court held that acceleration of the loan when a broker ended employment before fully repaying the loan, was not a penalty, nor inequitable.

We have not come across any cases in New York or elsewhere upholding liquidated damages specifically in the visa application context (rather than breach of a non-compete) context.   See, in contrast, Sentosa Care, et al.  v. Anilao, et al., 2010 N.Y. Misc. LEXIS 3123 (Nassau County, 2010) ($25,000 liquidated damages clause not enforced against immigrant nurses who quit within less than 3 years of employment, but for poor reasoning:  the amount was not an “estimate” because it purportedly could be readily determined at trial).  A companion case, Vinluan v. Doyle,  60 A.D.3d 237, 873 N.Y.S.2d 72 (2nd Dep’t 2009), held that criminal prosecution of the same nurses, purportedly on the ground that they had violated New York health code regulations that prohibit medical care professionals from abandoning their patients, was barred by the 13th Amendment to the U.S. Constitution – that is, the prohibition against indentured servitude (slavery).  In any event, so-called “liquidated damages” provisions that are clearly meant to be a penalty to prevent workers from leaving a job are not likely to be enforceable.

This brief (and by no means comprehensive) survey suggests three possibilities as to how to draft an agreement that can require repayment of some of the legal fees incurred in connection with, at least, obtaining a green card for an employee (but, as noted above, not for the labor certification process associated with getting a green card):

  1. An employer is not permitted to impose penalties, but the labor law regulations expressly allow for liquidated damages (meaning, a reasonable estimate of costs rather than an overreaching amount).   Thus, an employment agreement theoretically can provide for “liquidated damages,” as long as the amount demanded is reasonably related to the actual damages — that is, the amounts incurred for allowable attorneys’ fees and costs.
  2. Another avenue might be “loaning” an employee the amount legal fees associated with steps two and three of obtaining a green card, interest-free, and allowing for acceleration of the loan if the employee voluntarily leaves in less than, say, 6 to 12 months.  Again, we are not aware of any reported cases where an employer has enforced a loan to the employee in the form of legal fees for the green card, which loan might be forgiven after a short, reasonable length of time, of employment.  Even in the Banus case, above, the loan was an amount to be spent on anything the employee wished, rather than directed to be spent on green card fees.  So, this is a possible but still untested method.
  3. Lastly, an employer might require an incoming employee to put up a bond for the permitted green card legal fees.  The bond idea is initially attractive because it puts the burden on the bonding company (rather than the employer) to enforce the debt, but it has obvious downsides as well:  (a) employees might refuse or be unable to enter into such a bond (even if it’s relatively inexpensive), because the bonding company will want collateral from a new immigrant; (b) it contributes to a rather unfriendly work place, to say the least; and (c) it is untested, and might attract the attention of the Labor Department in connection with the green card application.

This is a work in progress, and I look forward to anyone’s questions or comments.

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Mark Kaufman
KAUFMAN & KAHN, LLP
Email:  Kaufman@KaufmanKahn.com

747 Third Avenue, 32nd Floor
New York, New York  10017
Tel.:  (212) 293-5556
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