Stay-or-pay clauses in Canada? Experts weigh in on the U.S. trend of charging employees who quit

“Stay-or-pay” clauses are a growing practice in the U.S., and while it is unlikely that such contracts will be upheld in Canada, there are still some lessons employers can learn from their neighbours south of the border, experts say.

The practice, which involves penalizing employees who break the tenure of their employment contract with sometimes very large amounts, purportedly to repay training, education, relocation or other costs, has made headlines in the States recently as employees begin to fight back against what they say is unfair treatment. Stay-or-pay clauses used to be mostly used with executives or highly specialized roles such as airline pilots or engineers, but due to economic factors employers have begun using the strategy with mid-and low-income workers.

HRD spoke with several experts about stay or pay clauses to find out how employers in Canada are managing similar issues of labour shortages and inflation.

Retention bonuses increasing as employers deal with inflation

Ioana Pantis of McMillan LLP in Toronto, said that retention bonuses – the closest equivalent to stay or pay clauses in Canada – have been used more frequently recently.

“This has especially been increasing lately because we see employers struggling to deal with inflation, so they can't necessarily increase wages, but they want to retain employees, so they'll give them a retention bonus, but have certain conditions attached to that retention bonus, such as having to repay it if they leave within one year,” said Pantis.

While generally employees understand their obligation to repay retention bonuses, Pantis explained, there are still areas where employers need to be careful of loose language in contracts.

“The main thing for employers to keep in mind are that these bonus agreements or clauses really need to be very clearly drafted with legal expertise, because if there's any ambiguity it could be decided in favor of the employee, so the employer might lose out on that repayment.”

Retention bonuses could interact with termination clauses

Also, if an employee is terminated and the employer doesn’t legally define the “just cause” for the termination, that mistake could render the entire employment contract unenforceable, including any retention bonus clauses, Pantis said.

“A drafting error could impact the employee's termination entitlements, it could invalidate the whole termination clause and entitle the employee to greater common law reasonable notice,” Pantis said. “So when drafting a repayment obligation –  that could include if the employee is terminated with cause they have to repay amounts to the employer – the employer still has to be really careful with drafting that, to not get into the termination clause language.”

Andrew Shaw, partner at Baker & McKenzie LLP in Toronto, agreed that retention bonuses in Canada are generally upheld as long as they have precise language, and if an employee breaks the contract, often the employer will choose not to pursue.

“It really depends on the size of the company, and how many times they would do this sort of thing, because you also don't want to set a precedent that you're not going to be going after these monies if the people don't stay,” said Shaw.

“Ultimately, it's an assessment of reasonability. If the person gets training paid for by a company and signs a contract with good language, then immediately leaves and goes to work for a competing company using those skills, I think a court would probably be pretty sympathetic to the employer, if they wanted to go through that entire process.”

Retention bonuses and stay or pay clauses can be bad for business and morale

Courtney Lee, Director of People Operations, of Humi, an HR software company in Canada, said that while stay or pay clauses might seem like a good way to retain talent, they could have consequences in the longer term in the form of lowered morale and reduced productivity as employees feel trapped at organizations they no longer want to work for.

Retention bonuses, while different in spirit as they are meant to reward an employee for staying rather than penalize them for leaving, can still have a chilling effect on the individual’s feeling of freedom to move, she said.

“You're retaining someone who doesn't want to be there potentially, and you're doing that at a cost, and that cost is likely going to be engagement,” Lee said, pointing out that research has proven that reduced engagement leads to lower levels of productivity and quality of work.

More intentional hiring can be more beneficial than stay or pay clauses

Lee, who has worked in HR for 15 years in finance in the U.S., the UK and Canada, advises improving hiring mechanisms rather than solely focusing on financial incentives; focusing on culture alignment at the hiring stage will be more valuable to the organization.

More in-depth interviewing, outlining role expectations realistically, and having honest discussions around core values are all important factors in retaining talent in the long term, she said, instead of “dangling a carrot”.

“Once you're confident you're hiring the right people, the shift becomes focusing on engagement, and driving the right kind of retention,” Lee said. “Focusing on your culture, focusing on your talent, or your total reward strategy, investing in leadership, investing in career development … all of that to say, retention without engagement is counterproductive, and it's just not going to be good in the long run.”